Government Budgets

President Obama's budget has been out long enough now to make the rounds.  Here, Professor Gregory Mankiw (Chair of the Council of Economic Advisers under President Bush) takes some issue with the President's budget.  The graph below produced by the Congressional Budget Office is illustrative:

 

As you can see, government outlays have increased sharply, as has the deficit and the resulting debt.  According to Mankiw's article, the President's own projections show that the deficit will not drop below 3.6% of GDP and will be 4.2% and rising at the end of the forecast period.  This level of deficit spending will result in a debt-to-GDP ratio of 77.2% (you can think of this number somewhat like debt-to-asset ratios, but with a slightly looser interpretation for the national economy).

Two things should be kept in mind here:

1. The level of 77.2% is not unprecedented.  We have had higher debt-to-GDP ratios, but
2. That level will not stop at 77.2% on the current path, but will continue to grow.

We have seen higher debt loads--at the end of World War II.  But, at the end of WWII, 85% of government spending was military, which quickly subsided after the end of the war.  Today, 85% of government spending is entitlements, which will not change significantly without serious political fallout.  So, we just do not appear to have the capacity to "grow out of the debt" in any meaningful way after the end of the recession.  Short story...we are going to have to start making some hard choices.