It is a fact that the national debt, and the debt/GDP ratio, is increasing year by year. This is not sustainable - either something fundamental must change to gradually lower the debt/GDP ratio, or some cataclysm such as a wealth tax, hyperinflation, or default will take it out. It is very possible that this will not be an obvious problem for some time to come - we’ve done OK so far - but mathematically speaking something will necessarily eventually reduce the debt.
The question remains, how will this happen? This blog post gives several scenarios:
(1) would require a large political change to trim government spending to match economic growth; it does not describe current conditions. Note that in the '90s it appeared that (2) was happening and indeed a small surplus materialized in the late '90s. However this was a one-shot deal, and the fundamentals of the economy reasserted themselves, first with a one-shot expense for the War on Terrorism, then on Obama’s large and long-term commitment to higher entitlements. So if you invoke (2) you’ll have to explain why government spending won’t grow along with the economy.
Personally I think that 4 is the most likely scenario, since it requires very little political courage (no single iron-willed politician needs to take responsibility for hyperinflation or default.) This seems to me to be the most accurate representation of our politicians.
Alternatively a sufficiently populist politician might go for #5 but I hope the public opinion hasn’t shifted that far yet.
(Doubtless Der Trihs will come and correct me on that last point, evil rich, etc etc.)
I agree this looks like a nasty pit we’re digging for ourselves.
It seems to me that #6 and #7 are essentially the same thing - if you offer to pay off a loan with dollars that have become worth 7 cents, isn’t that effectively a failure to pay what was owed?
#5 looks as if it could be constitutionally dubious. From where would come Congress’s right to enact a law that seizes private property?
#4, as noted, may not be capable of dealing with the projected level of debt.
Other developed countries have sustained higher levels of debt to GDP (that is well above 70%, e.g. Belgium) for significant periods of time, the assertion of not sustainable is probably true at some level. It may or may not be true of the current American debt GDP ratio. That is not an observation the ratio is Good or Bad, merely that empirically the assertion of clear non-sustainability seems false on its face (unless debt ratios grow further).
It would seem to me recent historical examples (e.g. in the EU of debt reduction relative to GDP provide several examples of “muddling” or multiple small policy changes that involve none of the catastrophic scenarios presented.
In Sweden, after our financial crisis in the early 90’s we ended up with a debt of about 80% of our GDP. It has been worked down to about 35% now and feels much less insurmountable. After some heavy budget cuts we started getting a surplus and the government finances started working better. So we sort of muddled through without any cataclysmic solutions.
I’m pretty sure you have a lot of things that could safely be scaled down or optimized over there to get a more stable budget. I suppose many of them are political suicide though.
I don’t know whether it would fall under 3 or 5, but the NY Times recently had an article about the growing belief that Congress will institute a VAT tax.
We’ll probably just grow our way out of it. It’s not really a problem in the short or medium term and if we do get health spending under control even in the next decade then decent GDP growth will see the debt/GDP ratio fall to manageable levels. Add on a tax increase for top earners at some point down the line and there’s your problem solved.
Maybe someone can explain why these are stupid ideas?
-Quit importing oil. I know, T. Boone Pickens was of this mind, but the fact is we spend about half a trillion per year to import oil as a nation. Go batshit for ev’s and biofuels, wind generators and solar panels which we export and… I know, it isn’t a half-trillion a year in tax dollars, but over a 20-year time frame surely it could help?
-Trim the military. Trim $100 billion per year, not the whole thing. Get out of the wars when possible, go from $650 billion to $550 billion annually. Our military is by far the largest in the world, so why can’t we do this? I know it amounts to only $2 trillion over 20 years, but those are genuine tax dollars saved. Political suicide?
I guess it depends on how you look at it. According to these graphs, military spending as a percentage of GDP and also as a percentage of discretionary spending trends downward since WWII. (Of course in absolute dollars the number always increases). However, the graphs conveniently leave out the Bush Administration, which I’d wager shows a reversal of the trend.
Under certain assumptions this might produce benefit long-term. In the short term, it would require a ferocious increase in expenditures (as existing vehicles are rendered obsolete, new industries soak up cubic miles of capital, etc.) which makes it look questionable.
First of all it seems there is some confusion between government debt and trade deficit. The biggest problem IMHO is the trade deficit and probably also what the article is about. One of the differences with some of the European examples given is that the tade deficit of the US has been growing for the last oucple of decades; the US (collectively) has continuously been consuming more then it produces. In exchange for these goods they have been exporting bonds, shares and the like. This means the Chinese (and other exporting countries) have a shitload of these financila assets in US dollar) and are thus wary of too much inflation as it would amke these assets worthless.
As to what is going to happen, I am curious and worried. I don’t see the entire country changing their habits and the like soon (nothing to do with the US, no country can change their behaviour just like that) and as soon as the economy picks up - note that the crises has really brought de trade deficit down - the same patterns will reemerge. So, is their going to be hyper inflation, efaulting or any of the other things mentioned? I hope it will be the slow inflation scenario, but - like most economists - really don’t know.
My personal prediction, expressed here on occasion, is increasing inflation followed by relatively peaceful dissolution of the Federal government.
Our democratic system allows us to vote current benefits out of future pockets. We have increasingly combined that with larger and larger centralized government.
It is unlikely we’ll be able to avoid a USSR-style meltdown, in my opinion. There is no incentive to vote for someone who is fiscally responsible, and both Republicans–Mr Bush and his idiotic wars, for instance–and Democratics–Mr Obama and his idiotic stimulus nonsense–are increasingly inclined to put what they perceive as current mandates ahead of the ability to pay for them.
Efforts to tax wealth will never succeed, and in any case there is no stomach for it since we typically elect the wealthy to represent us.
I do think we will be able to hang on for 25 years or so. I doubt it will be longer. At some point the income from taxes will only serve to pay debt interest, with no actual benefits being returned. At that point, I think the masses will simply decide to walk from their obligations. Psychologically we have grown increasingly lax about some sort of notion that we should pay our debts. I note, for instance, how much blame was assigned in the recent crisis on “predatory lenders” instead of “irresponsible borrowers.” Unfortunately, with national debt, the predators will not be under our control.
national debt and trade balance are entirely different. the government doesn’t import oil, exxon-mobile does, and they are definitely NOT incurring debt.
the national debt consists of all the treasury bills, notes, bonds, and variations within it. everything from the bonds you and i own to the large number of 30 years bonds that China is accumulating, in which case deflation is AWESOME for China since each dollar can now be exchanged for more “stuff” like euros, or ipods.
anyway, the debt is definitely not as pressing as the blogger makes it out to be. he even mentions defaulting which just wouldn’t happen. especially since they’re the ones that print the money.
in fact, the rising debt though as a whole is growing higher and higher, it’s to be expected since the interest rates are so low and the stock market isn’t performing as well. people are taking their money out of stocks and putting it into the safer bond market. it’s not rampant, and is explained by the poor economic state rather than any excessive spending on the government’s part.
to gauge excess spending the blogger should address the national budget rather than national debt if he’s concerned about spending. however his “solutions” are more geared towards the trade deficit which is a tough thing for the government to regulate. the free market determines who should produce what, and right now the money generated from investment in other countries is enough to offset the difference in dollars of what we import. it’s not like we’re importing stuff on credit. americans are buying and the dollars are coming from somewhere - China, India, etc. It’s just that physically the people doing the buying are still in America but their money is being made in other countries. However they’re using those dollars to in turn buy stuff for their american homes. again, not as serious as the blogger makes it out to be.
and the percentages he gives… what a load of sub-bayesian garbage. he’s estimating the likelihood of nanotechnologies to save the american economy from… public debt?
oh, and “devin finbarr” 's comment at the end of the blog explains in further detail of why the debt is not that serious.
Sure. But the OP frames the problem as the ratio of debt to GDP. I see the energy revolution proposal as a potential way to greatly increase domestic product. As another poster pointed out, maybe the up-front costs are prohibitive. I guess it depends on how you view the long-term risks.
And stopping the outflow of all that cash for fuel means the money sloshes around in our economy instead.
So, more industry-> bigger tax base, no?
less money overseas-> more money in our economy, no?
I can’t say I know what math to use to predict the actual results. Anyway, my comments here are to help me improve my understanding, not to fight to the last over a particular proposal.
Whoa, whoa, whoa. You’re conflating activity in the secondary bond market with primary debt issuance? Unless I’m really misunderstanding what you’re trying to say here, you don’t seem to understand at all how this whole thing works.
Because:
(i) importing oil is the only way for your economy to function in the near term
(ii) Alternative Energy Sources are not yet clearly mature enough to replace hydrocarbons, despite the misty eyed fuzzy thinking Greens’ self deception.
(iii) Biofuels as per Ag biofuels probably are not sustainable (although exotics may be, e.g. algae tanks, etc) nor a net gain.
That being said, over a 20 year time frame, investing in energy efficiency and supporting long-term investment in Alt Energy sources, nuclear, solar, etc. and yes, you could see very significant gains. Probably worth a national investment plan as near term volatility in energy has tended to undercut pure-private investment in Alternatives.
On this, probably merely political suicide given such a large portion of your military spending seems geared to cutting edge development against a foe that ceased to exist almost 20 years ago.
