by John B. Taylor Info
John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at Stanford’s Hoover Institution.
Enter your email address:
Enter the recipients' email addresses, separated by commas:
Message:
Enter your email address:
Enter the recipients' email addresses, separated by commas:
Message:
If we’re not careful—and less spendthrift—the U.S. economy will be heading for a state of permanent recession, argues Stanford economist John B. Taylor.
The current slowdown in the U.S. economy is a serious concern. After growing at 5.6 percent in the fourth quarter of last year, the economy slowed to 2.7 percent in the first quarter of this year and likely to only 2 percent in the second quarter. It’s not the V-shaped recovery it should have been, and as a result the economy is not generating enough jobs to bring down unemployment from tragically high levels.
Some argue that we need more deficit spending—another stimulus package—to boost the economy. I agree that the economy needs a boost, but not in the form of increased deficit spending. In my view, the economy is being held back by high deficit spending and related policy uncertainties. The large deficits are causing the federal debt to explode, raising concerns about how it will be financed.
The Congressional Budget Office projects that the debt will reach an unbelievable 947 percent of GDP by 2084 if we stay on the current course.
Data recently released by the Congressional Budget Office give plenty of cause for concern. The CBO focuses on debt in proportion to gross domestic product, a measure of the resources available to service the debt. According to the CBO, the debt will reach 62 percent of GDP this year, a level not seen since 1951 when America was still working off the debt from World War II. But rather than decline as it did in the 1950s and 1960s (to less than 30 percent of GDP), the debt is now expected rise sharply in the next 20 years—to 146 percent of GDP. In fact, CBO projects that the debt will reach an unbelievable 947 percent of GDP by 2084 if we stay on the current course.
Experience shows that such high debt levels reduce economic growth. Historical studies conducted by the International Monetary Fund reveal that an increase in debt by 10 percent of GDP is associated with a decline in economic growth of 0.25 percent. Thus, the increase in the debt from 44 percent in 2008 of GDP to 62 percent this year is already reducing growth by about one-half a percent and the 84 percentage point increase in the next two decades by another 2 percentage points. That would bring the U.S. economy to less than zero growth—yes, a permanent recession.
Other studies support these findings. Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland find that economic growth is 2.6 percentage points higher for countries with debt below 30 percent of GDP than for countries with debt above 90 percent of GDP. They also find that ballooning debt makes the economy more susceptible to financial crises, as Greece just demonstrated. Paying interest on the debt is a growing demand on tax revenue, crowding out government programs: The CBO forecasts that interest on the debt will eventually exceed spending on all government programs combined if we stay on the current path. Such high interest payments will eventually lead to high inflation as people realize that inflating the debt away is the only recourse.
In years past, some argued that we should not worry about the debt because it is paid to ourselves, but half of U.S. government debt is owed to foreigners, which is obviously a burden on future generations. In the meantime, our foreign policy suffers: A country’s bargaining position is weaker when a creditor country is on the other side of the negotiating table.
Not all the increase in the deficit is due to the stimulus packages and the recession; unsustainable growth of entitlement programs is a big part of the problem. But a focus on deficit spending distracts from efforts to address the long-brewing entitlement problem. Adding to the budget uncertainty is that many tax provisions are scheduled to expire in just six months, and without legislative action, there will be a substantial tax increase on all Americans.
The reason why a deficit-reduction plan is not being articulated and carried out now is apparently a concern that it would remove needed stimulus from the economy. But for all the reasons listed above, the best economic stimulus would be for the government to set a clear path now to reduce deficit and to bring down the debt in the future.
John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at Stanford’s Hoover Institution.
Get a head start with the Morning Scoop email. It's your Cheat Sheet with must reads from across the Web. Get it.
For inquiries, please contact The Daily Beast at editorial@thedailybeast.com.
Enter your email address:
Enter the recipients' email addresses, separated by commas:
Message:
Would this entail a reduction in military spending? The reduction and eventual retraction of the American Empire of 700 military bases around the planet? How about corporate welfare? Will that be part of this balancing the budget that you propose, Sir? How do you propose that we achieve that? Or should America land of the Free, Home of the Brave continue crushing its own people? I think we need your explanation Sir.
Thank you. As a first time user, your comment has been submitted for review. It can take anywhere from a few hours to a day or two for your comment to be reviewed, depending on the time of week and the volume of comments we receive.
Please log in to leave comments.
Mel Gibson's Wild Kids
Nicole LaPorte is the senior West Coast reporter for The Daily Beast and the author of The Men Who Would Be King: An Almost Epic Tale of Moguls, Movies, and a Company Called DreamWorks.
Vet Snub Shocks Families
Leslie H. Gelb, a former New York Times columnist and senior government official, is author of Power Rules: How Common Sense Can Rescue American Foreign Policy (HarperCollins 2009), a book that shows how to think about and use power in the 21st century. He is president emeritus of the Council on Foreign Relations.
Cameron: Al-Megrahi ‘Should Have Died in Jail’
But defends BP against charges of meddling.
Senate Committee Approves Elena Kagan
Lindsey Graham only Republican to vote for her.
Is Breitbart's NAACP Video Really Racist?
Gov’t worker resigns after saying she didn’t help white farmer.
Sign me up for The Daily Beast's morning email and breaking news alerts.
Sign me up for The Yes List, weekly cultural recommendations from The Daily Beast.
I'd like to receive e-mail notifications as:
Sign me up for occasional special offers sent by The Daily Beast on behalf of select sponsors, and for occasional special offers from IAC companies.
Partner Sites: Expedia| Hotels| Hotwire| Urbanspoon| Life123| LiveDaily| Reference
Sign me up for The Daily Beast's morning email and breaking news alerts.
Sign me up for The Yes List, weekly cultural recommendations from The Daily Beast.
I'd like to receive e-mail notifications as:
Sign me up for occasional special offers sent by The Daily Beast on behalf of select sponsors, and for occasional special offers from IAC companies.
or
Register using Facebook to share comments, stories, and other activity easily with your Facebook feed.
Lost your password? Check the box, enter your Email Address above, then click Submit, and we'll email you a link to change your password.
Read Full Article »