Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
There are two competing narratives about the federal government budget in the political mainstream today.
Today's Economist
Perspectives from expert contributors.
The first is that we are, or soon will be, in crisis, because of runaway government spending. To avoid this crisis, we should cut spending by a great deal and as soon as possible.
The second view is that all talk of a fiscal crisis is essentially a hoax; we have a jobs crisis, and we should spend as much as necessary to get us out of the deep recession. From this perspective, we should fix the budget once the economy is back on an even keel.
Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, is very much in the first camp, as seen in his proposed budget, which passed the House last week. President Obama is substantially in the second camp, as he demonstrated with his strong anti-Ryan remarks in a speech on Tuesday.
Both views are dangerous, in very different ways. The raw numbers on the total level of federal government debt would seem, at first glance, to favor the "sky is falling" view. Total federal government debt held by the public stood at $10,883,217,233,063.87 at the end of April 2 (the Treasury helpfully provides this calculation "to the penny" on a daily basis).
The latest available estimate of the total population of the United States, which is calculated monthly by the Census Bureau, is 313,358,751 (at the end of February). This number is "resident population plus armed forces overseas" from the bureau’s "monthly population estimates"). So the debt is just under $35,000 a person.
Some of this debt we owe to ourselves, i.e., American citizens own the debt of the American government. But about half of our federal government debt is owned by foreigners. (For the most authoritative cross-country data, see Statistical Table 9 of the International Monetary Fund's Fiscal Monitor, published in September 2011, second to last column, under the heading of "Nonresident holding of marketable central government debt, 2010.”)
Imagine if we had to all pitch in and pay down that debt owed to foreigners over the next 12 months — $70,000 per family of four. Who could afford to do that?
But we do not have to pay down the debt. Investors around the world have chosen to buy United States government debt, and they continue to regard it as a "safe asset" despite the continuing low level of interest rates. Investors will hold the debt of a well-run company or government as long as they expect to receive interest payments "“ a very long time.
As a country, what we need to do is to keep the increase in this debt under control, while ensuring that the economy continues to grow. It is debt relative to G.D.P. (i.e., relative to the total size of the economy) that matters.
Debt has surged, relative to G.D.P., six times in American history, during the War of Independence, the War of 1812, the Civil War, World War I, World War II and since 2000. In the first five instances, debt rose as the government scrambled to raise resources to pay for a war effort. After each of those wars, debt was steadily reduced relative to the size of the economy "“ over decades, not over months or even years.
The debt surge since 2000 is different "“ a point that James Kwak and I explain in detail in our book, published this week. To be sure, we have the two expensive wars, in Iraq and Afghanistan.
But much more of the increase in the deficit was because of tax cuts under George W. Bush, Medicare Part D (which expanded coverage for prescription medicines) and "“ most of all "“ the financial crisis that brought down the economy and sharply reduced tax revenue starting in September 2008.
Our modern debt surge is much more about declining federal government revenue than it is about runaway spending. If you believe strongly that our fiscal issues are primarily about "runaway spending," please read our book.
The smart approach is to begin the long and not-so-nice work of controlling deficits while allowing the economy to grow.
The kind of austerity now being experienced in Europe is absolutely not what is called for in the United States. We have time and space for a fiscal adjustment, particularly because the world remains favorably inclined to buy United States government debt, and this holds down our long-term interest rates.
But there is no reason to be complacent. Market sentiment can turn quickly. There is no way of knowing when the world could turn in such a way that international investors would want a higher yield in return for holding United States government debt. We need to reduce our vulnerability to a sharp increase in long-term interest rates.
How can the United States signal that we can deal with the deficit without actually doing too much too soon? The answer is simple. Do not extend any of the Bush-era tax cuts, which expire at the end of this year. That would represent a major step in the direction of stabilizing debt relative to G.D.P.
President Obama has proposed that the tax cuts not be extended for people who make more than $250,000 a year. But that high threshold would not raise enough revenue to alter the deficit in any significant way. To really affect the sustainability of the debt, we need the tax cuts to expire for everyone "“ an unpopular message, to be sure.
If the economy remains weak, not extending the Bush tax cuts could be combined with a temporary cut in the payroll tax, preferably tied to employment relative to total population. We have the ability to put in place exactly that kind of maneuver.
There is no need for panic over our fiscal situation. Nor is tough talk enough. We need to start down the path of stabilizing debt relative to G.D.P.
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Has the 1996 Welfare Reform Been Reversed?The push for people receiving welfare payments to work, enacted in 1996, has significantly been reversed by laws and regulations since then, an econom
Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
There are two competing narratives about the federal government budget in the political mainstream today.
Today's Economist
Perspectives from expert contributors.
The first is that we are, or soon will be, in crisis, because of runaway government spending. To avoid this crisis, we should cut spending by a great deal and as soon as possible.
The second view is that all talk of a fiscal crisis is essentially a hoax; we have a jobs crisis, and we should spend as much as necessary to get us out of the deep recession. From this perspective, we should fix the budget once the economy is back on an even keel.
Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, is very much in the first camp, as seen in his proposed budget, which passed the House last week. President Obama is substantially in the second camp, as he demonstrated with his strong anti-Ryan remarks in a speech on Tuesday.
Both views are dangerous, in very different ways. The raw numbers on the total level of federal government debt would seem, at first glance, to favor the "sky is falling" view. Total federal government debt held by the public stood at $10,883,217,233,063.87 at the end of April 2 (the Treasury helpfully provides this calculation "to the penny" on a daily basis).
The latest available estimate of the total population of the United States, which is calculated monthly by the Census Bureau, is 313,358,751 (at the end of February). This number is "resident population plus armed forces overseas" from the bureau’s "monthly population estimates"). So the debt is just under $35,000 a person.
Some of this debt we owe to ourselves, i.e., American citizens own the debt of the American government. But about half of our federal government debt is owned by foreigners. (For the most authoritative cross-country data, see Statistical Table 9 of the International Monetary Fund's Fiscal Monitor, published in September 2011, second to last column, under the heading of "Nonresident holding of marketable central government debt, 2010.”)
Imagine if we had to all pitch in and pay down that debt owed to foreigners over the next 12 months — $70,000 per family of four. Who could afford to do that?
But we do not have to pay down the debt. Investors around the world have chosen to buy United States government debt, and they continue to regard it as a "safe asset" despite the continuing low level of interest rates. Investors will hold the debt of a well-run company or government as long as they expect to receive interest payments "“ a very long time.
As a country, what we need to do is to keep the increase in this debt under control, while ensuring that the economy continues to grow. It is debt relative to G.D.P. (i.e., relative to the total size of the economy) that matters.
Debt has surged, relative to G.D.P., six times in American history, during the War of Independence, the War of 1812, the Civil War, World War I, World War II and since 2000. In the first five instances, debt rose as the government scrambled to raise resources to pay for a war effort. After each of those wars, debt was steadily reduced relative to the size of the economy "“ over decades, not over months or even years.
The debt surge since 2000 is different "“ a point that James Kwak and I explain in detail in our book, published this week. To be sure, we have the two expensive wars, in Iraq and Afghanistan.
But much more of the increase in the deficit was because of tax cuts under George W. Bush, Medicare Part D (which expanded coverage for prescription medicines) and "“ most of all "“ the financial crisis that brought down the economy and sharply reduced tax revenue starting in September 2008.
Our modern debt surge is much more about declining federal government revenue than it is about runaway spending. If you believe strongly that our fiscal issues are primarily about "runaway spending," please read our book.
The smart approach is to begin the long and not-so-nice work of controlling deficits while allowing the economy to grow.
The kind of austerity now being experienced in Europe is absolutely not what is called for in the United States. We have time and space for a fiscal adjustment, particularly because the world remains favorably inclined to buy United States government debt, and this holds down our long-term interest rates.
But there is no reason to be complacent. Market sentiment can turn quickly. There is no way of knowing when the world could turn in such a way that international investors would want a higher yield in return for holding United States government debt. We need to reduce our vulnerability to a sharp increase in long-term interest rates.
How can the United States signal that we can deal with the deficit without actually doing too much too soon? The answer is simple. Do not extend any of the Bush-era tax cuts, which expire at the end of this year. That would represent a major step in the direction of stabilizing debt relative to G.D.P.
President Obama has proposed that the tax cuts not be extended for people who make more than $250,000 a year. But that high threshold would not raise enough revenue to alter the deficit in any significant way. To really affect the sustainability of the debt, we need the tax cuts to expire for everyone "“ an unpopular message, to be sure.
If the economy remains weak, not extending the Bush tax cuts could be combined with a temporary cut in the payroll tax, preferably tied to employment relative to total population. We have the ability to put in place exactly that kind of maneuver.
There is no need for panic over our fiscal situation. Nor is tough talk enough. We need to start down the path of stabilizing debt relative to G.D.P.
Reducing the nation’s debt relative to gross domestic product requires steps to increase employment and revenue. Cutting taxes, tough talk and posturing will not solve the problem, an economist writes.
The push for people receiving welfare payments to work, enacted in 1996, has significantly been reversed by laws and regulations since then, an economist writes.
Trimming the budget deficit is hard work and requires compromise, and it’s easy to turn to gimmicks and accounting maneuvers to give the illusion of progress, an economist writes.
Many Americans seem to feel they have a right to all the health care they need but should not be required to make provisions beforehand to pay for it, an economist writes.
The Federal Reserve has been overwhelmingly attentive to bankers’ needs, and that’s not likely to change any time soon, two economists write.
Floyd Norris, the chief financial correspondent of The New York Times and The International Herald Tribune, covers the world of finance and economics.
Catherine Rampell is an economics reporter for The New York Times.
Binyamin Appelbaum covers business and economic topics for the Washington bureau of The New York Times.
Annie Lowrey covers economic policy for the Washington bureau of The New York Times.
Motoko Rich is an economics reporter for The New York Times.
Each day, Economix offers perspectives from expert contributors.
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