Averting The Coming Debt Crisis Now 102% of the Nations Economy and What Government Action Poses the Greatest Risk to Growth The Coming Recession? or Bankruptcy and who will pay?

Posted by $ MichaelAarethun 7 years, 8 months ago to Economics
12 comments | Share | Flag


I. The current grim outlook has serious implications for the sustainability of government budgets over the long run.
Paul Winfree

Paul Winfree is the director of the Thomas A. Roe Institute for Economic Studies at The Heritage Foundation.

Government debt has grown by $13.6 trillion over the past two presidential administrations—from 54 percent of the economy when President George W. Bush took office to 102 percent today in President Barack Obama’s final months.

The Congressional Budget Office estimates that debt will grow by another $9.8 trillion over the next decade, but only if policymakers break their addiction to driving up even more spending in future legislation.

“When the crisis hits, it will come quickly and will be severe,” @paulwinfree writes.

Over the next 35 years, debt held by the public (that is, debt not including borrowed money from the Social Security and Medicare trust funds) could grow from 74 percent to 224 percent of gross domestic product, according to the Government Accountability Office.

The Daily Signal is the multimedia news organization of The Heritage Foundation. We’ll respect your inbox and keep you informed.

Failure to address the growing debt will result in a fiscal and economic crisis. When the crisis hits, it will come quickly and will be severe. Bond prices will fall and interest rates will spike. Debt service payments will skyrocket. And the economy will enter a deep recession.

The initial timing and magnitude of the crisis will be driven by psychological factors. However, the fundamentals of the crisis will eventually win out unless policymakers do something to confront the causal factors driving the underlying unsustainability of this massive debt.

Policymakers across the ideological spectrum make misinformed claims about how their favored positions will change the government’s future financial position.

Some say that taxes levied on the rich will save the government from financial ruin. Others suggest that the fiscal outlook can be improved by cutting down on duplication, ending waste, or even eliminating a federal agency or two. Still, others argue that economic growth spurred by tax cuts or investment spending will improve the fiscal outlook.

But they’re as ill-equipped to improve the long-run sustainability of the federal budget as the mythbusters are to catch Bigfoot.

The next president and Congress should consider that policy choices are relevant to the sustainability of government finances. Not all revenue increases or spending reductions are equal.

And as I show in a new paper, all revenue increases, and almost all spending reductions, will not meaningfully change the long-run fiscal sustainability of the budget.

By analyzing the long-run fiscal trends between spending and revenue, I find that just 2 percent of all spending accounts within the federal government are driving the underlying unsustainability of the budget.

But while the problem is contained, it is significant, as projected spending from those accounts is equivalent to 60 percent of gross spending over the next 10 years, with spending on public health care contributing the largest component to the fiscal imbalance. However, the federal government’s retirement and pension programs also drive a significant portion of the underlying instability.

Furthermore, the U.S. is not an outlier. Other large economies also have unsustainable entitlement programs.

As economist Alberto Alesina noted in a recent interview, referring to the international Organization for Economic Cooperation and Development: “[As for] OECD countries with taxes over GDP ratio in the order of 50 percent, if you don’t stop the growth of social entitlements, we will always be running after a moving target that is always increasing.”

This grim outlook has serious implications for the sustainability of government budgets over the long run. Delay in dealing with the underlying unsustainability severely limits future fiscal choices.

In 2009, Peter Orszag, director of the U.S. Office of Management and Budget, said “the path to fiscal responsibility must run directly through health care.”

He was mostly correct. Reducing health care spending growth is a necessary, but not sufficient, condition to dealing with the federal budget’s underlying unsustainability.

>>> Read the Report: Causes of the Federal Government’s Unsustainable Spending


II What Government Action Poses the Greatest Risk to Growth

Salim Furth / @salimfurth / July 10, 2016 / 6 comments

A large and compelling body of evidence says that spending cuts do much less damage to future growth than tax increases do.

Salim Furth, Ph.D., researches and explains how public policy affects economic growth as a research fellow in macroeconomics at The Heritage Foundation’s Center for Data Analysis. Read his research.

Proponents of higher government spending have used the Great Recession to argue that balanced government budgets hurt economic growth.

In a new paper published by the National Bureau of Economic Research, economists Antonio Fatás and Larry Summers argue that deficit cuts during the recovery from the Great Recession, particularly in Europe, seriously hurt growth prospects in the long run.

Their approach, however, assumes away the key policy question—whether deficits can be shrunk without inviting a recession—instead of tackling it directly.

An ample empirical literature has shown that although tax increases and spending cuts can both decrease deficits, they have markedly different effects on economic growth: Tax increases are much worse for growth.

In their paper, Fatás and Summers lump tax increases together with spending cuts, and then compare the effect to growth forecast errors, which reflect the degree to which pre-crisis economic models were inaccurate.

They conclude that deficit cutting is more harmful to economic growth than the models implied. But a quick glance at the data suggests that forecast errors in 2011-2012 were strongly predicted by tax increases, but not by spending cuts.

By lumping the two strategies together, Fatás and Summers mislead policymakers.

Fatás and Summers also portray austerity as a choice made by eager politicians. However, despite lots of hectoring by economists, few governments made major cuts before bond markets forced them to act.

Examining a similar set of countries, I found that 12 reduced government spending from 2007 to 2012. Of those, 11 faced significant pressure from bond markets, substantially limiting their ability to run deficits unabated.

However, the choice of policy mix differed widely across countries. Although the majority emphasized spending cuts, a minority led with tax increases.

For policymakers in a crisis country such as Ireland or Portugal, the question is not so much whether to cut the deficit, but how. A large and compelling body of evidence says that spending cuts do much less damage to future growth than tax increases do.
SOURCE URL: http://dailysignal.com/2016/07/07/how-we-can-avert-the-coming-debt-crisis/?mkt_tok=eyJpIjoiWkROaVpERmlOamcyWVRZdyIsInQiOiJ1SHpCSUdPeXNTN1wveTExVVd2eEpJZ2JSZk9EakFxbG1oWUliZFJrdFJiVXJ6b3lWem91enRVSERvYWdVYjNQVjZVXC9LXC82UE5QclhrS01EZFR1ekZrV1pcL1h4aCtCZVhpMUdpVU5MaUpFNlE9In0%3D


Add Comment

FORMATTING HELP

All Comments Hide marked as read Mark all as read

  • Comment hidden by post owner or admin, or due to low comment or member score. View Comment
  • Posted by $ 7 years, 8 months ago
    TANSTAAFL

    Like 2008 you will see crisis cobbled to gether to create red herring panic in the wrong directinon and mislabeling it as Great Recession II.

    What it is. The same old cycle of repression featuring inflation, devaluation and debt repudidation the refusal to pay debt once again out of the unfunded retirement programs and the funded but helpless to raiding retirement programs of the elderly who cannot work any more. 20% cut in buyinigi power and no COLA last time how much will be taken this time?

    If indications are accurate more than the remaining 60% but for the uncaring DumboAss in the White House there is no caring. So Military....feel like upholding your oath of office now? What makes you think your exempt? Old Folks still going to vote left wing? You deserve to be left standing in lines at the food banks.

    So far you have four choices. Left, Left, Left and Starve.
    Reply | Mark as read | Best of... | Permalink  
    • Posted by Dobrien 7 years, 8 months ago
      Thanks for posting Michael. The cows have left the barn , (that is the cash) spent on what? Shovel ready! Close to 20 trillion in debt at (normal 100 year avg interest rate) = 1 trillion in interest expense aprx 1 third of annual govt revenue.
      Some sobering numbers 108,000,000 working age US not working /126,000,000 working.
      The tipping point has been reached.
      If you Add rapid increases to min.wage requirements, The small business employment engine will seize.
      Keep increasing govt regulations most directed by UN elected bureaucrats and the growth disappears.
      How these career statist's can look in the mirror is
      Beyond me, and the ignorant entitled socialistic dole recipients should research Soviet or Red China or Cuba to see how much entitlements the average Ivan , Xian or Carlos receives......
      As usual no good candidates, who ever is endowed the presidency they won't have a solution to the coming fiscal crisis. More power will be bestowed upon the FED Reserve and F the little guy.
      I hear the fat lady singing.
      Reply | Mark as read | Parent | Best of... | Permalink  
      • Comment hidden by post owner or admin, or due to low comment or member score. View Comment
      • Posted by $ 7 years, 8 months ago
        Ballots or Bullets Shug
        Reply | Mark as read | Parent | Best of... | Permalink  
        • Comment hidden by post owner or admin, or due to low comment or member score. View Comment
        • Posted by $ 7 years, 8 months ago
          We can't avoid it but can we at least not continue stealing from the old people and the retired military. Remember their stuff isn't funded with the social security turning into IOU's upon arrival. It goes to General Budget first.

          So what other target besides them considering the cycle is inflation, devaluation of buying power and refusing to pay the debt of COLA or debt repudiation and refusing pay raises that are nowhere near the actual losses. HAcking half the military will work for a while until the phase with the next war or continuation of this one i see OBubba II has already set that one in motion this week. OR just go in win that damn thing and go home making good use of available assets and technology. At this point we're not going to escape war either. IF we gotta have them make them worth while. Whack out Iran and take their oil fields for example. I'm being bitterly fascetious but I'm sure what's left of the military would n't mind and then those in the active and inactive reserves waiting for full time status again

          I'm waiting for the day they realizxe they have the guns and the pay office is right over there. Send Congress ot a re-education camp for a year or two. should cover that bill. No one to stop them. DHS would probably join in as long as no one touched the President.. Hell put a battalion around the White House. Under their oath of office it's not only legal but required and is a counter-revolution

          So. what next. Use Bush I's policy of one building one country and there will be lots of nice stones in a few places. But if we are not bothered we stay out of their affairs and that means they stay in their country while we're settling our affairs.

          Mandatory language classes have a plan for that two and education put something back together honoring promises to the old folks and phase out income tax and social security for something a bit more reliable and less criminal

          Flynn? I dont' know he's a Democrat but Pareaus or however you pronounce his name....why not. He hasn't done nuttin' that any politician hasn't done.
          Reply | Mark as read | Parent | Best of... | Permalink  
          • Posted by Dobrien 7 years, 8 months ago
            Inflation is a hidden symptom of fiscal Irresponsibility that is shrouded in statistics manipulated to hide the continued eroding purchasing power.
            I am not holding my breath for the military to uphold their oath and am not confident that their 3and4 star leadership respects the constitution.
            Reply | Mark as read | Parent | Best of... | Permalink  
            • Comment hidden by post owner or admin, or due to low comment or member score. View Comment
            • Posted by $ 7 years, 8 months ago
              I didn't think it was hidden it seemed rather in the open and was transparent to anyone who noticed it took $10.00 to buy a paper back book all of a sudden and a standard nothing burger was in the $5 plus range or had shrunk to a Where's the Burger size smear of flavor where the meat used to go. I guess some people are blinded because the want to be blilnd. Imagine when you had hoped for so long for so much and here came the answer Obama Dollars. i remember one being interviewed saying "i'm celebrating because were'r all going to be rich." The reporter asked how? 'Obama dollars! He's going to print some out and give them to us.'

              Then the electric bill came, the rent came due, maybe a water bill. All raised to accouont for property taxes increasing I can imagine that woman sitting by the post box every day and finding nothing in it but more bills but no dollars of any description. But they had beleived to blindly and fervently and couldn't give that up Near eight iyears later they still approach that mail box finally taking a quick glance to find the spider still in residence. Some more quick witted are convinced the spider ate the dollars. Know what? They aren't wrong that's exactly what happened.
              Reply | Mark as read | Parent | Best of... | Permalink  
  • Posted by $ Terraformer_One 7 years, 8 months ago
    I was under the impression that WELFARE for (((israhell))) was THREE BILLION per year thanks to (((AIPAC))).
    Zionists can fund their own OPPRESSION of the Palestinians. NO NEED TO SKIM(steal) OFF American taxpayers.

    That THREE BILLION per year would be a nice little start to paying down the principal on "FERAL RESERVE" loans.
    Reply | Mark as read | Best of... | Permalink  
    • Comment hidden by post owner or admin, or due to low comment or member score. View Comment
    • Posted by $ 7 years, 8 months ago
      This is an objectivist site. If you can't present a topic without facts, cites, and sources and remember our founder so to speak is Ayn Rand not Anal Rant. By and large we are Constittional Republic oriented and do not use PC and for some do not recognize left wing definitions.

      Thank you this will make your visit a lot more profitable - intellectually speaking.
      Reply | Mark as read | Parent | Best of... | Permalink  

FORMATTING HELP

  • Comment hidden. Undo