NYtimes
By GRETCHEN MORGENSON
May 28, 2011
SAY this about all the bickering over the federal debt ceiling: at least people are talking openly about our nation’s growing debt load. This $14.3 trillion issue is front and center — exactly where it should be.
Into the fray comes a thoughtful new paper by Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics, which studies economic policy. Written with Marc Hinterschweiger, a research analyst there, the report states plainly: “That government debt will grow to dangerous and unsustainable levels in most advanced and many emerging economies over the next 25 years — if there are no changes in current tax rates or government benefit programs in retirement and health care — is virtually beyond dispute.”
The report then lays out a range of outcomes, some merely unsettling, others downright scary, that face us as a nation if we continue down the big-spending path we are on.
The report, “The Global Outlook for Government Debt Over the Next 25 Years: Implications for the Economy and Public Policy,” arrives when our debt as a percentage of gross domestic product is around 65 percent and rising fast. Much of the recent increase, up from 43 percent in 2007, is the result of the panic of 2008 and the ensuing recession, when the government stepped in to mitigate the damage.
The authors do not suggest that policy makers should hurry to raise taxes or cut spending right now. They acknowledge that the economic recovery is still fragile and propose that lawmakers wait to implement budget cuts currently under discussion until 2013 to 2015. Additional cuts would ideally go into effect in 2016.
What needs to be done now is to design a long-term plan to reduce fiscal deficits in the future. The authors contend that such a program would “reassure the markets, keep interest rates low and instill greater confidence and certainty about future tax and spending policies, thereby encouraging businesses to commit their resources to job-creating investment projects.”
An intriguing aspect of their analysis is how it views the rising tide of debt around the world from a historical perspective. For so many countries to be groaning under so much debt at the same time is unusual, the authors say. More typical are the somewhat contained debt crises, like in Latin America in the 1980s or in Russia in 1998. While both of those episodes reverberated beyond the countries from which they sprang, today’s debt problems are far more widespread. And, as a result, more worrisome.
The simultaneous buildup of very large public deficits and debt positions in virtually all of the advanced high-income countries “is a new element at work in the global economy,” the report says.
“It is unique in peacetime for so many countries to have so much debt,” Mr. Gagnon said in an interview last week. But he added that global capital markets, and the access to lenders that these markets provide, probably mute the ill effects of this simultaneous borrowing binge.
The paper assesses the potential consequences of a more pervasive debt crisis, one involving a number of countries in the same perilous position at the same time. The authors also consider the impact that future interest rate increases may have on these debt loads and provide separate estimates of how debt levels would grow under differing circumstances. They incorporate into these estimates expected growth rates in various regions as well as rising health care costs and retirement obligations. The analysis uses figures from the International Monetary Fund and the Organization for Economic Co-operation and Development.
Some of the results are surprising. For example, the study rebuts the commonly held notion that the outlook for Europe is worse than for the United States, as far as debt levels and obligations are concerned. This is because some euro zone countries have already begun to deal with their fiscal problems, Mr. Gagnon explained. “They’ve made some changes to long-run pensions, such as raising retirement ages,” he said, “and they’ve already made spending cuts and tax increases.”
Another surprise in the study: emerging markets are in much better shape, Mr. Gagnon said, than he had anticipated when he began the project.
Now, to the numbers, all of which are based on the status quo in tax rates and government obligations relating to health care and retirement.
You sitting down?
Under a best-case outlook, according to the authors, the nation’s net federal debt will rise to 155 percent of gross domestic product in 2035, more than double the current levels. (Net debt is defined as the government’s financial liabilities minus its financial assets.)
Under a more pessimistic view on growth rates, that load ratchets up to 302 percent of G.D.P. that year. As the paper notes, “debt ratios of around 200 percent of gross domestic product are at the extreme limit of what advanced economies can experience without becoming destabilized.”
Estimates for the euro zone fall well below these figures. Using an optimistic outlook for growth in that region, the analysis projects Europe’s debt to rise to 72 percent of G.D.P. in 2035. Taking a dimmer view on growth brings the debt level to 155 percent of output in the euro area.
Taken over all, debt levels in the advanced economies would rise to 122 percent of G.D.P. given an upbeat outlook, or 234 percent under grimmer circumstances, the study projects. Both Japan and the United States exceed these figures in expected debt loads.
By comparison, emerging economies look positively robust. Using an optimistic projection, their debt comes in at 35 percent of G.D.P., and under more pessimistic circumstances, rises to 59 percent.
HAPPILY, Mr. Gagnon and Mr. Hinterschweiger do not believe a Greek-style crisis is in the cards for the United States. They say that we have some time to start addressing our debt problems — five years at least. But given how our debt is growing, a fiscal crisis looms if policy makers do nothing.
“There may never be a single defining moment of crisis,” the authors write, “but rather a drift into ever-higher inflation and interest rates, ever-lower growth or deeper recession, and eventually hyperinflation along with rapid currency depreciation. Most economists would view such a prospect as a progressive strangulation of a nation’s well-being.”
This is straight talk on a vital topic. Let’s hope our leaders understand that living beyond our means will not be viable for a whole lot longer.
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