IMF to U.S.: You’re Broke
This is from Larry Kotlikoff, writing for Bloomberg Opinion:
The [International Monetary Fund] has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge…closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.” …
To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy.
Sobering thought. One that is being ignored by just about everyone in Congress.
Almost all the Deomocrats in Congress are in complete denial and although most Republicans admit there is a huge problem they are too timid to do anything about it.
States are not allowed to run budget deficits — accumulating debts that aren’t going to be repaid in the indefinite future. Why was this never applied to the federal government?
The way the Democrats are campaigning (The GOP is trying to privatize Social security!) they are making it impossible to solve the problem after the election is over.
Devon:
Very good question.
I understand that Vermont CAN run a budget deficit.
By the way, only the governmental entity can claim bankruptcy, not the citizens who support it.
Don Levit
So wrong on so many levels. First, tax receipts are down from the historical 20% or so of GDP because of the downturn. Second, even if we zeroed out the “discretionary” budget we would still be running a deficit. Third, we have a short term problem and a long term problem. The short term problem is getting the economy to grow. Regardless if that takes tax reductions or expenditure increases or both it will increase the deficit. With the 10 year at below 2.6%, the market is saying that we should borrow more, not less.
Long term, we need to show the markets we are dealing with the deficit, that means cutting entitlements, increasing revenue and increasing growth. In the end, as the world’s reserve currency and unlike the Eurozone having control of our currency we can always inflate our way out of it. We’ve had high inflation in the past and we can deal with it again if we have to. All the business and household analogies are so far off base they aren’t even wrong. Unlike every business, the US doesn’t have a capital budget. We expense aircraft carriers businesses depreciate equipment. Unlike you or I, the federal government can can print money. In the end, the amount of debt doesn’t matter, only the ability to service the debt and sell more debt when needed is all that matters.
“Unlike you or I, the federal government can can print money. In the end, the amount of debt doesn’t matter, only the ability to service the debt and sell more debt when needed is all that matters.”
artk, the problem with this statement is (as the IMF is implicitly recognizing) that on the path we are on we are headed toward a day when we will not be able to service our debt or sell more of it.
We have a deficit that is 10% of GDP but we are borrowing at 1%. No other country would be able to do that and if the international financial markets suspect we are going the way of Greece our borrowing costs will soar, and we won’t be able to get out of the probem by printing money — any more than the Greeks can.
Typical IMF. It puts closing the fiscal deficit in terms of tax increases rather than in terms of a reduction in government expenditures.
John, as I said, there’s a short term problem and a long term problem. As they say, people lie, markets don’t. The market is saying that the US should currently borrow more, not less. I’m surprised that you suddenly don’t trust markets. As for a Treasurys “bubble”, Treasurys pricing is based on the the fed funds rate and inflation. Do the math, yields might even be too high.