Wednesday, June 17, 2015

The ignored problem: the unsustainable U.S. debt

      For the most part, the deficit has faded from he headlines. It is ISIS, or Ukraine, or other things  that are in the news. The deficit is fairly low, running at around $880 billion annualized as of the end of the first half of of the 2015 fiscal year. It has plummeted since the recession of 2008, when the deficit(Sept, 2008-Sept. 2009) was nearly 1.9 trillion in today's money. However, the situation is not as good as it seems. Today, we are about 5 years after the end of the last recession. Recessions, or series of recessions, have occurred about every 9 years during the past 35. While it is difficult to predict recessions, the last 35 years suggest the next one should occur within the next 5.

     When the next crisis hits, it will be more difficult to make up for it using stimulus. On September, 30, 2007, shortly before the official beginning of the recession, the U.S.  government debt outstanding as a percent of GDP stood at about 70.5%, while between the official end of the recession, and peak unemployment, on September 30, 2009 the U.S. national debt as a percent of GDP was about 94.5%. It has somewhat stabilized, today at around 102.7% 5 years later. The concern isn't that the U.S. has debt, only once has the U.S. had no debt, and that was back in the 1830s. Running a deficit isn't too concerning either, times such as the surplus in 1990s are rare. Rather, the major concern is nearly 5 years after the last recession ended, during relatively good economic times, the total debt isn't shrinking as a percent of GDP. 

     With projections of the debt to GDP ratio at about 105.2% in 2019, the U.S. would probably use stimulus once again to increase Aggregate Demand and help lift the U.S, economy out of recession. However, the debt to GDP ratio is bound to increase significantly after this, making it harder to use stimulus. With Social Security and Medicare taking up a ever larger portion of the budget, the debt to GDP ration should continue to increase. After all, using a narrower definition of debt, to only that held publicly, the debt to GDP ration should increase from 74% of GDP in 2014 to 106% by 2039. The numbers are even worse if we use the total (public AND private) debt in our calculations, which the treasury, the debt clock, and most news networks do. Using the same ratio of public to private debt as today for 2039, the total outstanding debt would be about 146% of GDP.  This is higher than all of PIIGS(Portage, Italy, Ireland, Greece, & Spain) except Greece at the peak of the Euro crisis. Regardless of which projection method is used, the outlook it not good. This is all long term, and the U.S. has a huge advantage these countries don't, being able to borrow in its own currency. That being said, in a few decades, if another recession such as the previous one strikes, it will be much more difficult to use expansionary fiscal policy1or stimulus, an important weapon during the previous recession(up to 11.4 million full time equivalent employment years, which are a year of 40 works weeks, created or saved). Eventually, the U.S. will have to make some very difficult decisions about its budget. As we have learned from Greece, it is far better to do this sooner rather than later.

    1: According to the Economist(June 13-19th edition), the United State's wriggle room for dealing with a recession decreased by about 37.5% in the last 8 years. Since the deficit will increase in the future, its wriggle room will only decrease further.

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