December 17, 2012


Trillion-dollar deficits are sustainable for now, unfortunately (John H. Makin, 12/13/12,  American Enterprise Institute)

Trillion-dollar federal budget deficits have continued to be sustainable first because the federal government is able to finance them at interest rates of half a percent or less. Two percent inflation means that the real inflation-adjusted cost of deficit finance averages -1.5 percent, much to the dismay of savers seeking even a modest return on "safe" assets. [...]

The importance of the borrowing cost minus growth gap in precipitating a financial crisis is demonstrated most spectacularly by the experience of Greece, as shown in figure 6, which compares Greece's borrowing cost minus GDP growth gap with that of the United States. From the late 1990s, when Greece was scheduled to adopt the euro (most notably from 2000, when Greece was able to issue eurobonds) to 2008, Greece and the United States experienced virtually identical gaps, including negative gaps (borrowing costs below growth) during the 2002-07 "golden years" for debt accumulation.

After late 2009, when Greece revealed that its primary deficit had been far larger than previously reported, its borrowing costs soared while growth collapsed. The growth collapse was exacerbated by austerity programs aimed at reducing the primary deficit. Such ill-conceived efforts to condition bailouts on austerity were designed to reduce Greece's debt-to-GDP ratio but actually caused it to rise. This happened because growth fell so rapidly that tax collections collapsed and the primary deficit was little affected while the borrowing cost to growth gap soared, as figure 6 shows. The gap then soared to 65 percentage points, while the US gap fell to a remarkably favorable -2.2 percent, where it remains today. (See figure 7.)

The hyperbolic claim that the United States is becoming Greece because of the absence of dramatic progress on deficit and debt reduction is unfortunately ridiculous. There is not yet a sign that a US fiscal crisis will emerge to force Congress to enact fundamental measures like entitlement reform to reduce the growth of spending, or tax reform to enhance revenues through faster growth.

And really you can't just look at government, but at society as a whole.  How much more do you make on the money in your 401k than we pay in interest on federal debt?
Posted by at December 17, 2012 6:53 PM

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