The U.S. debt trap: the odds on seven solutions
How will America escape its debt trap? The indispensable Arnold Kling puts some odds on various scenarios. An excerpt:
1. Muddle through. No major change in policy, and no major change in economic growth, but somehow the ratio of debt to GDP remains stable. I give this a 10 percent chance, although it implies that I am miscalculating the path that we are on
2. Technology to the rescue. Some major technologies, probably either wet or dry nanotech, produce so much economic growth that the ratio of debt to GDP stays under control. I give this a 20 percent chance.
3. Policy changes. Congress increases taxes (but does not enact a wealth tax) and/or takes steps to rein in Medicare and Social Security spending. I give this a 25 percent chance.
4. Inflate away the debt with moderate inflation (between 5 and 10 percent per year). I think this would be politically costly, and it might not be enough to really inflate away the debt (it depends on how quickly bond investors adjust expectations and raise the inflation premium in nominal interest rates). I gives this a 15 percent chance.
5. Wealth tax. The government takes, say, 5 percent of everyone’s personal assets above $100,000. It does this on a one-time basis (or so it says). I give this a 25 percent chance.
6. Hyperinflation. This would certainly expunge the debt, but it would be political suicide.
7. Default. The U.S. simply refuses to pay some or all of its debt. I think that the combined chances of (6) and (7) are no more than 5 percent, with (7) even less likely than (6).
Me: I think #3 is mostly likely, though I hope #2 happens — and there is a greater chance of that happening than most policymakers realize.