March 30, 2013


A Sustainable Budget Should Endure Any Storm (N. GREGORY MANKIW, March 30, 2013, NY Times)

[T]he federal government can run budget deficits year after year, racking up ever-higher debt. And, indeed, that is pretty much what it has done throughout history. With the exception of a few years starting in the late 1990s, when the Internet bubble fueled an economic boom, goosed tax revenue and made President Clinton look like a miracle worker, the federal government has run a budget deficit consistently for the last 40 years. The debt that the federal government owes to the public has risen to about $12 trillion, from $341 billion in 1973.

It may be tempting to look at these facts and to conclude that there's no limit to what the federal government can borrow. But that would be a mistake. Even though the credit markets give the government more latitude than they give to ordinary individuals, the government still faces limits. It can borrow for a long time, perhaps even forever, but it can't go nuts about it.

A metric that economists often use to evaluate a government's fiscal position is the ratio of the government debt to the nation's gross domestic product. G.D.P. measures the total income in the economy and thus reflects the government's tax base. The higher the debt-to-G.D.P. ratio, the more a government will struggle to service its outstanding liabilities.

As a nation, the United States was born with a debt-to-G.D.P. ratio of about 42 percent, thanks to loans that were taken out to finance the American Revolution. In fact, throughout the nation's history, the most common cause of increases in the debt-to-G.D.P. ratio has been the expenses associated with military conflict.

The Civil War increased the ratio from 2 percent in 1860 to 34 percent in 1865. World War I increased it from 3 percent in 1914 to 31 percent in 1919. And World War II increased it from 44 percent in 1941 to 109 percent in 1946, the highest level in history.

...we're just now finishing up the Long War at 77% of GDP and we saw during the interval after the Wall fell how quickly we could turn deficits into surpluses.  The question is whether the global economy can withstand a declining US debt.  It seems unlikely.

Posted by at March 30, 2013 7:45 PM

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