Why the U.S. was never on the brink of disaster
It might be a little late to say so now, but as Washington’s Great Debt Debate winds down, but a few words on why this incident was a purely political construction.
Given all the sound and fury this spring and summer, it’s reasonable to assume the debt of the United States was so large that it had pushed the country to brink of economic disaster. This was never the case.
Carmen Reinhart and Kenneth Rogoff, the oft-cited co-authors of “This Time is Different: Eight Centuries of Financial Folly,” say countries are in trouble when their debts rise to about 90 per cent of gross domestic product. Glen Hodgson, chief economist at the Conference Board of Canada in Ottawa, has an “80 per cent rule.” Mr. Hodgson, a former Finance official, argues that “if a country’s government continues to run significant fiscal deficits and its public debt burden grows beyond 80 per cent of GDP, the growing nervousness of capital markets means that access to private credit can very quickly switch from open to closed, often with very little warning in terms of risk premia on existing debt or new borrowing.”
So, what is the U.S. debt-to-GDP ratio? About 68 per cent.
Pointing this out is not to argue that the U.S. should continue to let profligacy reign. The U.S. debt is on track to reach 90 per cent of GDP in a decade. The time has arrived to take budgeting seriously. But that’s different than being on the brink of disaster.
Expect this point to be made more forcefully in the months ahead by those who believe the present economic danger is high unemployment and an economy that is growing at stall speed.
Minutes after the Senate passed the agreement to lift the debt ceiling, President Barack Obama went to the Rose Garden of the White House to resume his push to extend cuts in payroll taxes and muster support for an infrastructure bank.
The case that the U.S. can afford initiatives such as these was made back in December by Thomas Ferguson and Robert Johnson of the Roosevelt Institute.
Among other things, they question whether the Reinhart-Rogoff rule applies to the U.S., arguing that countries that issue reserve currencies can service much bigger debts than those countries that don’t. They also point out there is another way to narrow the debt-to-GDP ratio: faster economic growth.
In an interview last week, Mr. Johnson, a former chief economist at the U.S. Banking Committee, said the biggest reason the U.S. deficit is widening is because of the recovery’s weakness. The government is collecting less revenue, while paying out more benefits to the unemployed. “We have a slump problem, not a debt problem,” he said.