US budget as a percent of GDP - different alternatives

John Taylor always provides insightful work on macroeconomics and his latest piece as an op-ed in the SJ on April 22 is no different. The picture above is needs little explanation. The stimulus from a recession is expected to be temporary. This is counter-cyclical fiscal policy. Over time, the stimulus should be reversed as private sources of growth offset the government stimulus. Consequently, the discussion should be about the path to move back to the long-term government/GDP share.

The Ryan deficit reduction path takes us back to the size of government that existed before the recession. Given the stimulus was supposed to jump-start the economy, this path is reasonable given it will take years to get there. The original Obama budget would never get us to the old level. The size of government would permanently be larger. Even at the new Obama budget proposal, the size of government is still permanently larger.

In this context, the budget choice relative to the long-term deficit is clearer. The end of the world is not coming if we are moving to a proposal that brings government back to pre-2008 levels.

Yuan hits highest level since 1993

China is following a managed appreciation and has taken the yuan up to 6.5 per dollar which is the highest level since 1993. This solves a number of issues. It releases pressure from the global community on trade imbalances. It also serves as a mechanism to help reduce inflation through cutting the cost for imports. This is especially the case for food coming from the US. Finally, the gradual appreciation allows exporters to adjust to the lower revenues. This may allow companies to avoid losses.

The PBOC has followed a steady policy of raising reserve rates, increasing interest rates, and allowing for appreciation all to stop inflation. We have not seen the impact on prices yet, but they are using all the tools available to control price gains.

US has a strong dollar policy

This was an important week with both the Treasury secretary and Fed chairman noting that we want a strong dollar policy. The quotes from each are below. The Treasury secretary is the person who usually takes the lead on dollar policy and Geithner was very clear on the US view.

Bernanke was more nuanced in stating that a strong dollar policy is in the interest of the US and that his policies will get there in the medium term.

"Our policy has been and will always be, as long as at least I'm in this job, that a strong dollar is in our interest as a country," he said at the Council on Foreign Relations.

"We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage," Geithner vowed, responding to a question about the dollar's recent slide.

"The Federal Reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy," Bernanke said at a news conference. "In our view, if we do what's needed to pursue our dual mandate for price stability, maximum employment, that will also generate fundamentals that will help the dollar in the medium term."

US Treasury interest payments manageable

Hat tip to the Angry Bear blog on US AAA fear-mongering. When you look at interest payments as a percentage of GDP, the US debt problem looks more manageable. This, of course, at the currently extremely low interest rates. Nevertheless, it does provide some perspective that there is room to devise a budget that can be reasonable. The sky is not falling just yet, but a continued approach of pushing the problem forward is not sustainable.