The best way to reduce debt is to grow. Right now Washington seems obsessed with the idea that cutting taxes in combination with cutting federal spending is the best way to go. Otherwise, we are told, the dollar will sink to zero value and our debts will sink our country’s value to zero.
But what if this formula doesn’t work? This formula has been in force for the past 11 years and hasn’t worked. What happened in fact, was that deficits increased dramatically and the country plunged into a Great Recession that accelerated the pace of the existing deficits. Now we are told to ‘double down?’
The truth is that countries seldom default because they can’t afford to pay down debt, they default because the public is convinced they cannot raise enough revenue to pay down debt.
From an economix op-ed by former IMF chief economist Simon Johnson and co-author of the best selling 13 Bankers.
On the first day of 1791, the recently founded United States Treasury had nearly $75.5 million in outstanding debt. This was roughly around 40 percent of gross domestic product, a large amount of debt relative to the size of the economy — but not out of proportion to what we have become accustomed to in recent decades.
However, relative to federal revenues, the debt was enormous — about 20 times the amount that the government was then capable of taking in. In contrast, the total Treasury debt outstanding since 1950 has fluctuated between 30 and 90 percent of G.D.P., with the debt-revenue ratio never worse than 5 to 1 — and in recent decades between 2 to 1 and 3 to 1.
The debt-revenue ratio matters, as it is relevant to whether the country can readily service the debt. Very few countries default because they can’t afford to pay their debts, either to their own citizens or to foreigners. Defaults occur when the political process in a country determines that, for whatever reason, the government cannot raise sufficient revenue……
Most of our government spending, now as always, goes to wars and transfers to relatively poor people and to older people. The military spending will come down — if we can end the wars (as we did in the past). The social transfers were constructed in a more open-ended fashion — and our long-term budget forecasts account for this form of future spending in a more transparent and more honest way than we do for the probability of future wars or financial crises.
The real budget debate is not about a few billion here or there – for example, in the context of when the government’s debt ceiling will be raised. And it is not particularly about the last decade’s jump in government debt level. Although this has grabbed the headlines, it is something that we can grow out of (unless the political elite decides to keep cutting taxes).
The real issue is how much relatively rich people are willing to pay, and on what basis, in the form of transfers to relatively poor people — and how rising health-care costs should affect those transfers.”
Beezer here. For the past 11 years we’ve had tax cut after tax cut and the net result has been disasterous. Still, one of our two political parties, the Republicans, maintains that we need yet more tax cuts, while at the same time decrying recession boosted deficits and supposed long term structural debt issues posed by our health care delivery system costs. We are told we need to ‘double down’ on a formula that produced disasters. The intellectual dissonance here is astonishing. So when Johnson points out that historically countries default because they refuse to raise sufficient revenues, not because they don’t have sufficient income, then it certainly appears we could be approaching that position. If the Republicans persist in resisting efforts to raise revenue then US default on debt is a real possibility.