We study economic growth and inflation at different levels of government and external debt. … Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.)
Me: It is the apparent WH belief that debt is a long-term problem only. But the R&R research warns that the rush to implement liberal spending priorities today risks sacrificing growth and a rising standard of living tomorrow.
Blue Dog Democrats have introduced an amendment to balance the federal budget by 2020. How that might happen, they don’t say. To get an idea just how tough that would be, look at Republican U.S.Representative Paul Ryan’s Roadmap for America’s Future. It gets the budget in balance without raising taxes by huge entitlement spending cuts. In 2020, his plan would produce deficits of close to 4 percent of GDP — and rising. His first balanced budget doesn’t arrive until 2063.
House Republicans Jeb Hensarling and Mike Pence want a constitutional amendment to limit government spending to 20 percent of GDP, its rough historical average. In their Wall Street Journalop-ed, H&P admit, significantly, that America cannot grow its way out of its debt problem:
Can we tax our way out of this problem? No. In order to pay for what we are on track to spend under current law, taxes would have to double. This would crush our economy and condemn future generations to a far lower standard of living. That is not an option. Can we grow our way out? Unfortunately, no. Although pro-growth policies like simplifying the tax code and lowering rates are critical components of any solution, they alone are insufficient. Mr. Walker estimated it would take double-digit economic growth every year for the next 75 years in order to close the fiscal gap.
Me: They don’t say how the government should hit that 20 percent goal, given the expected rise in entitlement spending. But it does provide a marker. They aren’t arguing for small government as much as typical government, at least overall. But hitting that 20 percent would require a radical transformation of US domestic economic policies. Both Social Security and Medicare would be transformed, particularly the latter. Nothing typical about that.
First, here is a bit from my Reuters Breakingviews column:
President Barack Obama might have stumbled upon a three-step path to financial crisis: 1) admit nation is dangerously in debt; 2) create high-profile deficit commission to find solution; 3) have commission fail. Subsequent market tumult could, of course, force a sudden, dramatic and harsh fix to America’s fiscal ills. But a rush job would be a poor way to solve the country’s long-term financial problems.
The immediate casualty of failure, however, would be the markets. Recall the House’s first vote against the $700 billion bank bailout in September 2008. The Dow industrials fell an unlucky 777 points in a flash. The bill passed two days later when panic set in on the Hill. Failure of the commission would send a frightful message to investors globally who have continued to buy trillions in Treasuries under the assumption hard budget choices would eventually be made.
True, a market jolt would again focus Congress’s attention. But that risks a hasty, ill-considered budget fix such as hiking taxes without a structural reform of America’s social insurance system. That would really be no solution at all.
Me: It’s like there arent’t all kinds of plans to cut spending. But Americans need to decide if they want to close the long-term budget gap through lower spending or higher taxes.
So, like, this thing isn’t going to work. You all know that, right? Rs pretty much have zero interest in higher taxes. Zero. And Ds pretty much have zero interest in cutting spending anywhere unless the money is shifted to some new program, as with healthcare. I read Greg Mankiw’s list of what Rs should get into turn for higher taxes
1) Substantial cuts in spending. Ensure that the commission is as much about shrinking government as raising revenue. My personal favorite would be to raise the age of eligibility for Social Security and Medicare.
2) Increased use of Pigovian taxes. Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue. He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.
3) Use of consumption taxes rather than income taxes. A VAT is, as I have said, the best of a bunch of bad alternatives.
4) Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.
5) Permanent elimination of the estate tax. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.
Rs aren’t going for a VAT, unless maybe it replaces income, investment and corporate taxes. So the commission will fail, followed by perhaps a debt/currency market freakout. And that will be followed by calls for emergency tax increases.
Why should Tim Geithner be so confident that America will “never” lose its AAA credit rating? The White House doesn’t currently have a long-term plan to stanch America’s fiscal hemorrhaging. Hoping and wishing for a successful deficit commission does not make a plan. The Treasury secretary’s statement sounds like one of those perfunctory defenses of the dollar.
But the so-called “Party of No” does have a plan. And Republicans may have a chance to sell it should they retake Congress. Yet even if the plan works, the financial bleeding wouldn’t stop for decades.
To be accurate, Rep. Paul Ryan has a plan. The Wisconsin Republican is a rising party thinker and odds-on future Budget Committee chairman if Republicans capture the lower chamber. The Ryan plan does eventually put America into the black without raising taxes, according to the Congressional Budget Office. This is critical since growth-killing tax increases will only make budget balancing that much harder.
How does he do it? By sharply cutting future social insurance benefits and partially shifting Americans into private retirement and healthcare plans. The new Obama budget plan forecasts a total debt-to-GDP ratio of 77 percent in 2020 (vs. 53 percent in 2009) with an annual budget gap of around 4 percent (vs. 10 percent in 2009). Talk about a rosy scenario. It assumes brisk economic growth, atypical following financial crises. It also assumes some budget cuts and tax increases that are politically unlikely. An alternative CBO forecast using — by its own admission — more realistic policy assumptions predicts a 2020 budget gap of 7.4 percent and a debt-to-GDP ratio of 87 percent.
The Ryan plan tops both. In 2020, it would have a budget gap of 3.7 percent and a debt-to-GDP ratio of 67 percent. But notice: even a plan created by a conservative budget hawk accepts abnormally high budget deficits a full decade from now. So beware of any politico selling quick fiscal fixes.
The Obama outline ends at 2020, but the CBO and Ryan plans take their forecast decades out. By 2040, Ryan still sees annual deficits of over 4 percent of GDP (and a debt-to-GDP ratio of 99 percent) before a long decline toward annual surpluses in the 2060s as spending eventually dips below tax revenue. Those numbers seem alarmingly high — though not vs. the stunning CBO forecast of a 223 percent debt ratio in 2040 and over 400 percent by the 2060s.
One can quibble about Ryan’s policy choices. Democrats might prefer more taxes and fewer spending cuts. But the essential point is that politicians will, at best, push for a slow departure from massive deficit spending. The question is whether financial markets will be patient enough to allow such a terribly long goodbye.
The answer, I think, is that whatever pivot is made will be irrelevant. The fact is President Obama doesn’t have the luxury of proposing an agenda. Agendas (or at least, agendas as we have come to think of them) are for people who have money. The United States is broke. And the debt gets worse by the day.
Therefore, President Obama’s job is to get us out of debt (or start us down the path toward that end). This job would be difficult in the best of times. President Obama has to do it in the midst of the worst recession since the 1930s. He has to do it in the midst of two wars in regions perpetually hostile to foreign influence. And he has to do it in the midst of a global recession so severe that it now threatens what erudite commentators call the “social cohesion” of our allies and trading partners around the world.
That being the case, and I think it is inarguably the case, President Obama will never be successful until he accepts the assignment that history has given him. No one (anywhere) believes for one moment that he can add 30-35 million people to the health insurance rolls and not increase (sharply) the cost of health insurance. President Obama has been peddling this fable for months now and it has only served to make him look either (a) naive, or (b) utterly cynical. No one believes that “cap and trade” legislation is anything like an urgent priority at this time. No one believes that securing the Olympics for Chicago in 2016 is an urgent use of the President’s time. No one believes that President Obama deserved or should have accepted the Nobel Peace Prize. The reason that Obama has seen his approval rating fall sharply is that people think he’s not doing his job.
His job is to get the country on a path to fiscal sustainability and to defeat (as much as humanly possible) those who seek to put nuclear weapons in our cities and detonate them in time for the evening news. His job, more accurately, is to cut costs, delay benefits, right-size government programs, rethink military and diplomatic strategies, re-focus our war efforts, all while rebuilding (or expanding) intellectual and physical infrastructure for the years ahead. And he must do all this while devising new strategies for jump-starting wealth creation. It’s more than enough agenda for anyone, even someone with President Obama’s admirable self-confidence and perhaps grandiose self-esteem.
“Stop spending money you don’t have” was the real message of the Massachusetts Senate election that vaulted Senator-elect Brown from the back benches of one of the most useless political institutions in America (the Massachusetts State Senate) onto the front page of The New York Times. “Do your job,” was the other, direct message to President Obama.
Point One: We often hear that the US government debt load is lower as a share of GDP than those of many other large, wealthy nations, including Japan, Germany, the UK and France. But a more apples-to-apples comparison, which combines federal, state and local government borrowing, suggests that the US is in worse shape than most other AAA-rated countries.
By that measure, the United States general government totalled 78.6 percent of GDP in 2009 and will hit 90 percent by the end of 2010, Fitch says. That would make us the the most highly leveraged of all AAA-rated countries — Germany, France, the UK, as higher than that of almost all other AAA-rated nations. (Japan’s debt is still much higher, but it lost AAA status back in the late 90′s.)
Point Two: the picture is even grimmer if you look at US government borrowing as a share of revenues. US goverment debt (federal, state and local) was 330 percent of revenues in 2009 — the highest ratio of any AAA country. And that 330 percent doesn’t include additional trillions of dollars in new “contingent liabilities” — bank guarantees, federally insured mortgage-backed securities, and so on.
After building a true budget baseline, the sobering result shows ten-year deficits of $13 trillion. The annual budget deficit never falls below $1 trillion. By 2019, the debt is projected at $22 trillion, or 98 percent of GDP.
These deficits are driven by spending. Even if all the 2001 and 2003 tax cuts were extended and the AMT were patched, 2020 revenues would be just 0.7 percent of GDP below the historical average. Yet 2020 spending would be 5.2 percent of GDP above the historical average. This means that 88 percent of the additional deficits would come from higher spending and only 12 percent would come from lower revenues.