Is the U.S. Closer to BALANCE? Not really.

A key point we make in our introductory essay in BALANCE is that the ratio of U.S government debt to GDP departed from its historical pattern – rising in wartime, falling in peacetime – with rise of the welfare state and burgeoning deficits from unfunded ‘entitlement’ spending.  A common reaction we have gotten to our core conclusion that different budget rules of the game are needed to right the fiscal ship is a crisp: At least it’s not so bad as in Europe.

Not so fast.  Total government spending relative to GDP in the United States is close to levels in Spain or even Sweden.

But we’re ahead of Europe on pro-growth policy to help manage the burden of debt, right?  Again, be careful.  Newly elected French President Francois Hollande proposed large tax increases on high-income individuals, a corporate tax increase, and subsidies to government-favored industries – an anti-growth, fiscally damaging brew, to be sure.  But U.S. President Barack Obama proposed large tax hikes on high-income individuals, a minimum tax on corporations, and subsidies for manufacturing as a government-favored industry.

Stay tuned.

5 responses to “Is the U.S. Closer to BALANCE? Not really.

  1. ” the ratio of U.S government debt to GDP departed from its historical pattern – rising in wartime, falling in peacetime – with rise of the welfare state and burgeoning deficits from unfunded ‘entitlement’ spending.” Time to dust off Robert Barro’s On the Determination of the Public Debt, which notes that debt also tends to rise during large recessions and fall as we get back to full employment. Of course, he wrote that in 1979 well after we got Social Security and Medicare. But yea – the Administration Dr. Hubbard served did give us a Prescription Drug Benefit and tax cuts too. What Barro missed by publishing his classic article was the 1980’s when we had another Republican promise us that we could cut taxes and reduce the deficit at the same time.

  2. Sorry, but I found the statement that “United States [debt/GDP] is close to levels in Spain or even Sweden” to be misleading.

    I would assume it would be more accurate to say that US debt/GDP levels are closer to the ones of Ireland and Italy. These 2 countries had debt/gdp ratios of 108.4,120.9 respectively (as compared to U.S debt ratio of about 104.1).

    Your statement is particularly misleading, because of the fact that Sweden is one of the strongest economies in the EU and is substantially more stable than Spain or the U.S.

    (I’ve used 2011 debt/GDP ratios, but the big picture hasn’t changed since then)

    Regards,
    Gytis

  3. Comparing debt dynamics in the US to those in Spain shows a complete misunderstanding of economics. Spain’s debt-to-GDP ratio was around 30 percent prior to the crisis. The reason why there is currently a run on Spanish bonds is because Spain has surrendered its monetary sovereignty over to the ECB. If Spain had its own printing press, then the yield on Spanish bonds would be comparable to that on US Treasuries or that on German bunds.

    History shows that it takes a really really really high debt burden for a stable democracy that issues all of its debt in its own currency to experience a debt crisis. Look at Japan. A debt-to-GDP ratio of close to 250 percent, yet yields on JGBs continue to fall.

    In short, the US is not even close to a debt crisis. If the US debt-to-GDP doubled tomorrow, there still would be no debt crisis. So stop talking about balanced budgets! Such discussions are just distracting the government from spending more money, which is needed to fill the massive demand gap that was brought about from the housing collapse.

  4. “At least it’s not so bad as in Europe.”

    Not being the first lemming in the stampede is only helpful if you are actively trying to move in a different direction. Whether we lead or follow Europe over the cliff will be of little comfort when we hit bottom.

  5. “A key point we make in our introductory essay in BALANCE is that the ratio of U.S government debt to GDP departed from its historical pattern – rising in wartime, falling in peacetime – with rise of the welfare state and burgeoning deficits from unfunded ‘entitlement’ spending.”

    Ratio of U. S. government debt to GDP from 1960 to today:

    http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=GFDEBTN_GDP&transformation=lin_lin&scale=Left&range=Custom&cosd=1950-01-01&coed=2012-04-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2012-08-30_2012-08-30&revision_date=2012-08-30_2012-08-30&mma=0&nd=_&ost=&oet=&fml=a%2F%28b*1000%29&fq=Quarterly&fam=avg&fgst=lin

    The marked upswing in Federal Debt beginning in 2009 had nothing to do with “entitlement spending” and everything to do with bailing out an overleveraged financial sector.

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