A new bill that would revamp student loan programs in the United States passed the House of Representatives. The proposed program, which would affect the largest change on college aid since they came into existence in the 1960s would push private lenders out of the business and put the U.S. government in control.

The new measure would end subsidies for private lenders, increase Pell Grants available for students in financial need, and create grants for community colleges. The proposal includes almost all of President Obama's key points on higher education from the campaign trail. It passed the House 253 – 171, with most representatives sticking to party lines.

No one likes a budget deficit, but run a deficit - - and a large one - - the U.S. must, and for two years, due to the depth and seriousness of the U.S. recession, so says an economist.

"We will likely have to run $1 trillion deficits for each of the next two years in order to provide adequate fiscal stimulus for the U.S. economy," economist David H. Wang told BloggingStocks Wednesday.

A large problem requires a large stimulus

What's driving the need for a large fiscal stimulus? The worst consumer and business demand conditions in more than 25 years, Wang said. "Every major demand factor in the economy...consumer, business, and capital investment, is retreating. The demand has to occur somewhere, and if the U.S. government does not create it, the recession with lengthen and deepen."

The U.S. recession, which began in December 2007, is already in its 14th month and there's no end in sight, based on leading economic indicators or economic fundamentals. One tell-tale stat: the job market. Or should one say, the 'non-job market.' ADP (NYSE: ADP) announced Wednesday that private employers cut another 693,000 jobs in December 2008. Meanwhile, many economists expect Friday's U.S. Labor Department job report to show a 500,000-job loss in December 2008. If it does, then the U.S. economy will have lost at least 2.5 million jobs in 2008.

Wang said continued monthly job losses above 200,000 would indicate to him "that the economy is entering a vicious cycle of corporate revenue declines, job lay-offs, decreased demand, leading to further corporate revenue declines - - that must be avoided."

Want to sum up the United States' fiscal situation in a word?

Warren Buffett did, or did so in 16 words to be exact, in a chat with The New York Times: "I'm paying the lowest tax rate that I've ever paid in my life," Buffet said. "Now, that's crazy."

Further, Buffett, the world's richest person as ranked by Forbes Magazine with wealth totaling $62 billion, also said the U.S. Government should increase taxes on the wealthy to help pay for the recently-passed bank rescue, which is designed to end the financial crisis.

Buffett's stance demonstrates that there is at least one person of high income and/or wealth (and probably many more) who believe upper-income groups should be paying more in federal taxes each year.

2001 tax cut generated large U.S. budget deficits

Buffett's view is also in stark contrast to the Bush Administration's philosophy and policy, which has prevailed for the decade and which argues that lower tax rates on upper-income groups will not only generate higher GDP growth, but also result in revenues high enough to close the federal budget deficit. It hasn't happened, said economist David H. Wang.

"A billion here, a billion there, and pretty soon you're talking about real money."

To paraphrase the late Senator Everett Dirksen (R-Illinois), if a couple billion is real money, what's $400 billion amount to? Fiscal trouble for the United States, says an economist.

The U.S. federal budget deficit will double this year, to $407 billion, from $161 billion last year, the Congressional Budget Office announced Tuesday, in its revised baseline projection report (pdf).

The CBO said a weakening economy, spending for the Iraq and Afghanistan Wars and the War on Terror, higher entitlement spending, and a slowing growth rate in federal receipts are among the factors that will push the deficit to 3% of GDP this fiscal year, which ends September 30.

The deficit will rise to $438 billion next year, fiscal 2009, remain roughly at that level, $431 billion, in fiscal 2010, before tapering to $325 billion in fiscal 2011.

The CBO also expects U.S. GDP to grow just 1.5% in 2008 and slow to 1.1% in 2009.

Economist Glen Langan said the multiple $400 billion deficits are bad enough, but they could rise considerably, if the U.S. Treasury's bailout of Fannie Mae and Freddie Mac does not go well. "If the housing market does not stabilize in the year ahead, Treasury could end up spending tens of billions more per year," Langan said. "Nearly all of that cost would be born by the taxpayer, which means the deficit will increase."

At first glance, word that the number of so-called primary government securities dealers decreased to 19 from 20 last month, may seem like a fairly esoteric concern that's removed from the typical investor and taxpayer.

But, in practice, it isn't that removed because fewer dealers means fewer firms bidding for U.S. bonds - - a circumstance likely to increase government (read: taxpayer) borrowing costs, Mark MacQueen, money manager of Sage Advisory Services told Bloomberg News Monday.

The number of authorized bond traders who make markets in U.S. Government debt decreased to 19 when the Bank of America (NYSE: BAC) acquired Countrywide Financial Corp., Bloomberg News reported. It will drop again, to 18, after J. P. Morgan Chase (NYSE: JPM) completes its takeover of Bear Stearns.

Economist David H. Wang agreed Monday that the bidder math is not running in the U.S. Government's favor at this juncture. "We know from basic economics that, historically, if the number of market makers declines, auctions will not be as efficient, and this will lead to higher financing costs for the U.S. Government," Wang said.

Another factor likely to drive up U.S. Government borrowing costs: the size of the U.S. Government's budget deficit, Wang said. The Congressional Budget Office projects that the Fiscal 2009 deficit will total $500 billion, up from $470 billion in Fiscal 2008, the current fiscal year, which ends September 30, 2008. (pdf)

The New York Times reports that the cost to bailout Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) could hit $25 billion. But that cost dwarfs what the collapse of the real estate market might cost our country in total. I think $8 trillion is a reasonable estimate -- that's about 56% of our $14.2 trillion Gross Domestic Product (GDP).

Why are we talking about a taxpayer bailout of these two government sponsored entities (GSEs)? After all, shareholders own them but there's some vague notion that since they're GSEs, government should bailout the investors who bought their $5.2 trillion worth of mortgage-backed securities (MBSs).

So how did the government pick the $25 billion figure? It turns out that the Congressional Budget Office (CBO) doesn't know how much the bailout will cost. So it is developing different scenarios. One suggests that a bailout will cost nothing. Another suggests that there's a 5% chance that the bailout will cost $100 billion. I think this means that the bailout has an expected value of $5 billion (the chance of the scenario times its cost). Regardless, the CBO's $25 billion looks like it will be joined by an estimate that follows the Fed and OCC's look at the books of Fannie and Freddie.

What's the new president - - Republican or Democrat -- likely to face after taking the oath of office in 2009?

Daunting fiscal problems -- and right at a time when Congress may have to consider more fiscal stimulus to jump-start the U.S. economy, one economist observed.

The biggest problem, economist Glen Langan said, will be the federal government's budget deficit. The United States is on-track to record a $200 billion deficit in Fiscal 2009 and a $241 billion in Fiscal 2010 -- and that's if the U.S. economy doesn't fall into a recession, Langan said, citing Congressional Budget Office data.

"The baseline CBO projections present a large budgetary task for the new president, but by itself it's not an impossible one, absent a major recession. The problem is there's no money available to tackle any other problems, including ones a Democratic president would address -- health care, energy policy, education and infrastructure. And don't forget the Iraq War, anti-terrorism efforts, and potential mortgage assistance programs," Langan said. "If there aren't changes to the tax code, given the current revenue structure and tax rates,to say the next president's hands are tied regarding new programs, would be an understatement."

It goes without saying that the U.S. economy has had its share of negative data points and projections recently.

Continued subprime mortgage defaults and related asset write-offs. Declining corporate profits. A perpetual trade deficit. The first yearly decline in median home prices in more than 40 years. Declining consumer confidence. Paraphrasing the understated former U.S. Federal Reserve Chairman Alan Greenspan, these are not the most encouraging signs with respect to economic activity.

Are there any rays of light on the U.S. macroeconomic horizon? Indeed there are, and one originated from an unlikely source: the Congressional Budget Office.

The Congressional Budget Office projects that the U.S. economy is unlikely to fall into a recession in 2008, and that an economic rebound could start as early as next year.