The End of Unsustainable Debt
As every economist knows, Stein's Law says that trends which can't continue don't. Unfortunately, it doesn't tell us anything about when or how they come to an end. Since our national debt is assumed by virtually all economists except my friend Jamie Galbraith to be unsustainable, and since it seems increasingly unlikely that Congress will act before it has a gun at its head, a few analysts are starting to think about when and how a debt crisis will ultimately emerge and how the government will respond.
In my Fiscal Times column this week I examine some recent research on this question. As I pointed out in a previous column, it is almost a certainty that higher taxes will be the primary governmental response. The reason is that the key metric of debt sustainability, according to bond market analysts, is not the debt/GDP ratio, but interest on the debt as a share of revenues. Therefore, cutting spending--even a lot--won't do any good in a crisis situation; only higher revenues will help calm markets.
One of the studies I cite in today's column did something interesting. It looked at the debt/revenue ratio as a measure of debt sustainability, as shown in the table below. As one can see, our debt problem is by far the most serious among the countries examined, and even raising revenues to their postwar average of 18.2 percent won't help much.
Debt Ratios, 2009 | |||
Country | Debt/GDP | Revenues/GDP | Debt/Revenue |
U.S. | 53 | 14.8 | 358.1 |
Greece | 115.1 | 36.9 | 312.2 |
Ireland | 64 | 34.1 | 248.4 |
Italy | 115.8 | 46.6 | 187.5 |
Portugal | 76.8 | 41.6 | 184.8 |
U.K. | 68.1 | 40.2 | 169.2 |
Germany | 73.2 | 44.3 | 165.3 |
France | 77.6 | 48.0 | 161.7 |
Spain | 53.2 | 34.7 | 153.2 |
Source: Morgan Stanley | |||
Plan
The solutions aren't that difficult, it is the politics that are tough. Real healthcare reform can save up to $1 trillion a year ( we spend $3000 per capita more than most countries), cut military spending in half to 2001 levels, simplify the tax code and make it more progressive and close loopholes and offshore tax havens. The problem is that we need campaign finance reform first.
And Japan?
Where is Japan on this list?
And does't Paul Krugman's blog post from today address that, at least somewhat?
http://krugman.blogs.nytimes.com/2010/09/03/paradoxes-of-deleveraging-an...
Debt to revenue is always going to look bad in a downturn.
Bruce, Interesting chart but
Bruce,
Interesting chart but it's cheating a bit on the comparisons. In most other countries you are showing a unified view of debt and revenue (because they aren't Federalist).
In the US, you are showing Federal debt and Federal revenue. Most debt is Federal (due to state and local BB requirements) but there's a lot of revenue from state and local taxation. So, if you made it apples to apples, it would look quite different. Total revenue is about 31 percent of GDP. This would push the US right into the bottom of the pack of the limited sample set. Since the Federal government funds state and local governments, it is fair to take an integrated view even though the debt largely accrues to the Federal government.
You are correct, here is a
You are correct, here is a link to a chart that backs that up:
http://www.usgovernmentrevenue.com/downchart_gr.php?year=2000_2015&view=...
Mr. Bartlett seems to be making the case that more taxes are the answer. What he fails to acknowledge is that in the past, tax increases resulted in more spending, not deficit reduction.
A VAT would be catastrophic because it would allow government to create another stealth method for draining the private sector of precious capital. I don't know how a former supply-sider can become a defender of high taxation and big government stimulus spending, yet here he is.
What is your evidence
What is your evidence to say that more taxes result in more spending? The recent past seems to suggest that more tax cuts result in more spending too. The modern Republican party seems to want tax cuts all the time. An honest approach would be no deficit-financed tax cuts. Cut spending first and then give tax cuts when you have surplus.
taxes
As you said before tax cuts led to more spending so I think it's safe to assume that raising revenue will increase spending.
But I agree with you full in the belief that "an honest approach would be no deficit-financed tax cuts. Cut spending first and then give tax cuts when you have surplus"
The spending bothers me so much as the tax ( borrows ) because it's not a tax cut when you are borrowing the money to pay for it.
I'm moved...
... to quote a great supply-side economist, Robert Mundell, who I once heard remark that one should never take an unweighted sample of economists' opinions.
JG
Health care
Health care costs cannot continue to skyrocket. They are unaffordable whether they come from the government pocket or the private pocket. This is why so many people lack health insurance. So that must be fixed.
What about Interest Rates?
After reading several columns by your colleague Stan Collender (and Krugman) on the general subject of the sustainable level of our public debt, I was led to believe that the only thing that mattered is the current rate of interest on Treasury's. Are you suggesting it is not that simple?
I discussed that in the column.
You have to click on the links.
Yes, you did.
My question was, as you may have surmised, rhetorical. I did follow your links. And, yes, it's not that simple. Please explain this to Stan.
Funny, I read it too...
And at least this part appeared to be in line with what stan was saying:
A new study from the International Monetary Fund says that whether a major country’s debt is sustainable is primarily a function of the interest rate paid on it, not the size of the debt per se. On this basis, our debt is much less of a problem than may appear...If we were anywhere near a debt crisis, these rates would be considerably higher. Rates would have to rise quite a bit just to get back to normal...
...Moreover, the federal government’s interest expense is at a historical low of 1.4 percent of the gross domestic product. This is about half the level that prevailed throughout the 1980s and 1990s. According to the Congressional Budget Office, interest on the debt won’t get back to 3 percent of GDP until 2017, despite a projected rise of 8 percentage points in the debt-to-GDP ratio.
Of course, interest rates can rise sharply and very quickly if economic conditions change. But historically, changes in the level of indebtedness have not triggered a rapid rise in interest rates. The main cause has been a rise in inflationary expectations.
Bolding is mine. So interest rates don't rapidly change when the "bond vigilantes" mount up and form a posse, huh?
Let's be honest. While Bruce is right that the the short-term debt will need to be rolled over in five years' time, there is every indication that neither inflation nor interest rates are going to be especially high in the near future either. It just doesn't strike me as likely that the United States is going to have much in the way of inflationary expectations any time soon.
Oh, and stop trying to leverage one of the site's bloggers against the other. It's unseemly.
The Supply of Capital
You are going in the wrong direction. What matters is the ratio of debt to the supply of capital. Tax receipts don't matter as the government has a monopoly on the supply of "National Economy Backed Securities".
We have a gigantic bond market and debt holders know that there will always be buyers regardless of the size of the deficit.
Cutting taxes on savings and investment will increase total savings and investment. The increase in the supply of private capital from supply side tax cuts reduces interest rates and increases government's purchasing power. This is why tax cuts have been a money machine rather than starving the beast.
There is a Laffer curve for bond receipts. At 100% tax rates there is zero after-tax income to borrow. You cannot tax income and borrow it too. Holding interest rates constant, lower tax rates will create more capital and increase bond receipts. At zero taxes, a significant percent of GDP can be sustainably borrowed. The bond-Laffer-curve is monotonically decreasing.
Another ...
Arnold Kling has a paper on Guessing the Trigger Point for a U.S. Debt Crisis (though it is more about considering the factors involved than making a specific guess).
Sorry, but....
Debt/Revenue is a completely meaningless number. Perhaps net debt service (interest payments) relative to revenue would be somewhat interesting, but debt/revenue is nonsense.
Debt/GDP is far more relevant, and by that measure, we're better off than every single country listed in the chart.
The answer to "when and how a debt crisis will ultimately emerge" is simple - there isn't going to be one. We're under a fiat money regime and our public debt is denominated in our own currency. Furthermore, our debt/GDP is nowhere near historical "danger zones". Once the economy starts picking up, the resulting growth in GDP and tax revenue are going to make all of the doomsdayers look awfully silly.
Astounding
The arrogance of your post. Something I'd expect from the GWB regime. You cant grow your way out of this problem that we have now and going forward.
You sound like a " tax cuts pay for themselves " person
Umm, no.
That is the exact opposite of my point.
Debt to Revenue
You mostly made the point I was going to make. Ultimately debt service to revenue is the valid comparison when trying to evaluate the ability to service that debt. Debt to revenue figures into that and can be used as a rule of thumb, but as long as there are people lining up to roll over your debt you don't even have to have the income to service it. Many so called "commercial real estate developers" are currently using/abusing this technique to hold on as long as they can to their empires of underwater property.
Sure, government borrowing at the level the developed economies are currently operating in sure looks like Ponzi-finance. It may prove to be. Hence the valid call for research into finding out under what conditions a debt implosion may happen.
The whole thing is very interesting. A RE developer has some combination of income and assets (land or buildings mostly). The government has printing presses and the power to tax. If, before lenders loose faith, revenues rise to the point where all the debt doesn't have to be rolled and can be paid neither the RE barron nor the government will default either outright or technically.
Faith in the borrower can last long after it should. The fallacy of sunk costs comes to mind as one possible cause of that.
My opinion is that such research will never produce a line in the sand beyond which a debtor can never cross. What is produced will be a gray area of rapidly shifting probabilities that may or may not be correct.
As long as we have slack in the economy from a deficit of demand, running the printing presses won't cause inflation. And if we use the newly printed currency to buy back government bonds we'll force some money back into the economy. The risk then is that it all goes to purchase dead assets like precious metals instead of other items that are mostly labor and involve actual creation instead of extraction.
what debt problem?
Right now there is a HUGE glut of savings. In fact, that has been one of the big problems since the early 80s. We've had lots of savings, but incomes have been flat so there haven't been any real investment opportunities. That led to bubble after bubble as investors thrashed money around looking for real growth and sustainable return. Until we raise incomes and increase the demand for goods and services, we will continue to have a savings glut. We have the same problem we had in the 1930s, rising productivity, but no rise in income, and it will require the same solution.
Our nation, and many others, have survived much higher debt ratios than our current one. In fact, we'd do better with much more debt, providing we turn it into income rather than even more savings.
You'll notice that we didn't have a debt scare when we embarked on that great failed economic experiment in tax cutting. We didn't have a debt scare when we spent trillions to attack Paraguay or Iraq or whatever. Anyone with half a brain is asking "why now"? The answer is simple. Some of the money might go to someone who works for a living. That scares the living pee out of some people.
Growth Hawks for Monetary Stimulus
Unsustainable debt is all the more reason we should turn to an aggressive Fed policy to stimulate the economy. It is actually the conservative thing to do.
Growth Hawks need to present a solid argument to the public to beat back the Japan Wing of the Fed.
Japan tried a strong yen and zero inflation for 20 years. It has been a disaster--GDP growth rates in France have exceeded those of Japan, and equity and property values have fallen by 75 percent.
Scott Sumner has been blogging about this, with very worthy proposals.
Taxes will rise, okay
Taxes will rise, I expect. We have a lot of debt, and we need to pay it off. At some point, the Chinese (and the Japanese teacher's union pension fund, and German pension funds, etc) will stop buying our debt.
I am worried that we will raise taxes on stupid things, which will damage peoples' incentives to do socially useful things. Ever since John Anderson went underwater, politicos have feared to raise gasoline taxes, but cheap driving encourages energy consumption and carbon emissions and traffic jams. Our huge homeownership subsidies encourage too much housing stock, and what we build is too lush compared to our real wealth. The health care just passed seems likely simply to change how we pay for the overly-expensive care we now receive, rather than to encourage cheaper means of provision (minute clinics, nurse practitioners, etc.)
Perhaps a silly question
I am not an economist but I have a question. Based on the commonly stated multipliers for government spending and tax cuts, it seems clear that tax cuts or spending on the wealthy are a low multiplier and spending on infrastructure, education, etc. have much higher multipliers. Isn't there an economic argument for increasing taxes on the rich and spending the money on infrastructure as a revenue neutral and effective way of lowering the debt? Given the historical high income inequality and lack of economic mobility, it would seem like a strong argument could be made.
Apinak/Spending plan
I'd like to build a bridge to europe and drive all the left wing and right wing idiots there so we can get down to solving real problems. Maybe I'll even name the bridge after on of them
Interest/Revenues?
> Arnaud Marès says that the ... What really matters is a nation’s interest expense as a share of revenue.
It would be interesting to see that charted, instead of/in addition to debt/revenues.
Got that handy?
Thanks,
Steve
Inflation
The debt will be inflated out of existence. In fact, already is. That's how it will end.
Your view on government sponsored enterprises
michael lind has a great post on GSE's and their potential for reinvigorating America's manufacturing sector.
http://www.newamerica.net/publications/policy/public_purpose_finance
I would like to know your thoughts on this matter, if you have the time.
-P.S. keep up with the great posts