Economics, Pethokoukis

The inconvenient truth about the US national debt

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Harvard economist Kenneth Rogoff keeps interfering in the “debt is not a problem” daydream:

The idea that one should just ignore all these problems and apply crude Keynesian stimulus is a dangerous one. It matters a great deal how the government taxes and spends, not just how much. The US debt level is a constraint. A growing number of empirical studies, including my own joint work with Carmen Reinhart, suggest that the US has already reached a debt level that has been associated with slower growth in advanced countries. The fact interest rates are low today does not necessarily mean the US is an exception to this rule – take one look at stagnant Japan’s rates. The dollar’s reserve currency status buys America more room, but how much and for how long? A high debt burden is a problem precisely because it reduces a country’s capacity to deal with future shocks.

In this FT piece, Rogoff makes another good point: It’s one thing to cut defense spending as a way of reducing debt. But it’s quite another to de facto shift that spending to expanding the welfare state and leave the debt problem to metastasize. “At the very least, if military expenditures continue to fall, it becomes more important to have the fiscal capacity to ramp them up in response to new threats.”

 

14 thoughts on “The inconvenient truth about the US national debt

  1. The need is for a pro-growth (accelerated) strategy. (1) Freeze spending at current levels (24% of GDP), (2) invest in infrastructure, (3) increase our manufacturing capability (for high tech and low tech). In addition to fed budget, there is over $2 trillion in cash in corporate America, the Fed has $1.4 trillion available for investment. Increasing mfg (and increasing exports) and decreasing fed spending in relation to GDP will also bring down our current accounts deficit. As the economy picks up, raise interest rates and reform tax policy to favor savings over debt financing. And bring equity into our system so all who produce (work) benefit from our increased productivity. The debt we have is not a burden on our growth if we spend it right.

  2. Japan’s debt to GDP ratio is over 240% and they’re applying more stimulus to attempt to get inflation going…what does rogoff have to say about that?

  3. And what does Rogoff have to say about the failure of the Fed to reinflate the economy despite trillions in newly printed money. To be specific, why are trillions sitting idle at banks, corporations and money funds even as the economy recovers, ever so slowly? Could it be that they see little sign of — dare I say the word — demand?

    Japan let deflation pyschology take hold in the ’90s. Thanks to the Rs, we are repeating that mistake.

  4. But it’s quite another to de facto shift that spending to expanding the welfare state and leave the debt problem to metastasize“…

    In other words don’t pull an FDR?

  5. we have yet to decide as a nation what PERCENTAGE of actual available revenues we’d allocate to entitlements, DOD, National Defense and the rest of govt.

    As long as we continue to talk about percent of GDP, we are evading the essential reality of our actual available revenues for spending.

    Juandoze would have us spend nothing for entitlements but what is a realistic number?

    Are we, as a country, really ready to turn away the poor from ERs?

    My view is that if we are really not prepared to do that – then it becomes a game of how much we spend (or not).

    so does anyone want to venture forth and put a percent of how much we should spend on DOD and entitlements?

    • We should spend 0% on defense. What is the worst case scenario? Russia takes over and we are subject to a 13% flat tax? Hard to imagine any scenario worse than the Obama Administration.

    • larry g you silly boy, you’ve yet to read the constitution…

      Juandoze would have us spend nothing for entitlements but what is a realistic number?“…

      Realistic number = 0

      Are we, as a country, really ready to turn away the poor from ERs?“…

      Its NOT the federal government’s job to worry about the poor…

      What larry g refuses or is incapable of understanding is that extorted tax dollars from the productive are being used to buy votes from the parasitic on a national scale…

      Washington Times: Welfare spending jumps 32% during Obama’s presidency

      • “so does anyone want to venture forth and put a percent of how much we should spend on DOD and entitlements?”

        LESS, especially on entitlements.Defense is already getting the meat axe, time for the greedy geezers to take their haircut.

        • The greedy geezers have died off, sad to say. Reagan impaneled the Greenspan Commission to fix SS for all time, and Congress enacted its recommendations in 1984, radically hiking FICA taxes to build a cushion for the coming Boomer retirements. The SSA holds $2.7 trillion of the national debt Because retirees of that era still had a sweet deal, Congress also authorized taxing SS benefits up to 80 percent of annual distributions.

          Today’s retirees, and I am one, paid jacked up rates for most of their working careers. According to SSA tables, my wife and I will earn a 1 percent return on SS if we have normal lifetimes. The tax stayed.

          Medicare is a different question. Sort of. Because hospital stays can bankrupt 99 percent of the population at some point, and because hospitals can’t refuse to treat people who show up at the ER — post Obamacare that requirement is subject to debate — cutting Medicare without rationalizing healthcare is like squeezing a balloon, satisfying on your end, less so on the other.

  6. THE US FICTIONAL DEFICITS, DEBTS AND UNFUNDED LIABILITIES COULD BE COLLATERALIZED BY APPROXIMATELY 1.6 BILLION TONES OF FICTIONAL GOLD ENOUGH TO FILL UP A 400 CUBIC YARD OF A FICTIONAL WAREHOUSE.
    FICTIONAL BS???
    BUT, ALAS, AMERICANS HAVE BECOME FICTIONAL AS WELL…

  7. “It matters a great deal how the government taxes and spends, not just how much.”
    A number of the other comments address ills that would be corrected by the Fairtax.

  8. Cut $600 billion from defense related spending and cut $600 billion from SS, Medicare, and all of the useless programs that the federal government runs but are not constitutional. You can do it now or you can do it after the bond bubble collapses.

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