Monday, December 15, 2008

The Bailouts Compared to the Cost of War

Figures in the hundreds of billions of dollars become mind-boggling and difficult to envision. How big are they really?

Here's a useful chart:

Item  Size ($ trillion)     % GDP

U.S. GDP  14.2   100

National debt   5.4   38

Annual gov’t spending   3   21

Revenue   2.5   18

Historical avg revenue   -   17 to 20

Bailout so far   1.6   11

Wars in Iraq and Afghanistan   0.8/yr   3 / yr.

What does this tell us?

First, America has a big economy. We produce nearly $15 trillion worth of goods and services each year. The national debt is big, too - more than the annual federal budget - but it doesn't need to be repaid all at once.

In one sense, the bailout is huge. It's more than half of what the government spends in a year. On the other hand, if people were really worried about debt, they'd be asking every day if we're getting our money's worth from the wars in Afghanistan and Iraq.

There are other ways to shrink the deficit. We could raise taxes slightly, since we're at the low end of the historical average, but that alone won't do it. Nor will cutting spending from the traditional budget, unless the cuts were huge - far deeper than is likely to be politically possible. A ten percent cut wouldn't do it, nor would twenty percent, if we include interest due on the bonds issued.

But there is a way. The gap between spending and revenue is about 3% of GDP, which is also the size of our spending on the wars in Iraq and Afghanistan. Without those, we're in far better shape, with many more financial tools to help our own economy.

We've spent nearly twice on those wars so far than on the entire financial bailout. Another way to think of that is to imagine how much economic stimulus we would have if we spent that money here at home, instead of wasting hundreds of billions on graft and poorly supervised projects abroad.

How you feel about the war is a political issue, of course. But if you care about national finances, it should be an economic one, too.

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