Economics

There's No Fiscal Crisis, Except for That Fiscal Crisis Thingie

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Former International Monetary Fund Chief Economist Simon Johnson has an extremely odd little piece up at The New York Times that claims to give a "no" answer to the headline "Does the U.S. Really Have a Fiscal Crisis?" The sum of Johnson's arguments are in the lead paragraph:

The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overly indebted countries typically have a hard time financing themselves when the world becomes riskier — yet turmoil in the Middle East is pushing down the interest rates on United States government debt. We are still seen as a safe haven.

Any standard measure? The most standard measure of crisis-level debt is north of 60 percent of GDP, a threshold we blew through one year ago. You can find this standard measure, by the way, in just about everything the IMF has published on the subject, including this bit from December:

What is a desirable debt level for these countries to ensure fiscal sustainability? This is a difficult question to answer: the target must take into account country-specific considerations concerning sustainable debt in light of fiscal policies, demographics, and unfunded entitlements, as well as long-term interest rates and output growth rates. For example, a return to the precrisis public debt level may not be sufficiently ambitious for countries that had high ratios before the crisis. A widely used approach is to define specific thresholds of 60 percent of GDP for advanced economies and 40 percent of GDP for emerging market economies—reflecting the perceived higher risk for the latter. The 60 percent of GDP target for advanced economies is roughly also the median debt-to-GDP ratio of those economies before the crisis.

What's more, as the Washington Post pointed out in a Sunday depresser, the unprecedented state and local fiscal crisis (which, as the events in Wisconsin underscore, really is upon us right the hell now) makes those bad numbers look worse:

Even if analysts leave aside the debt held by the Social Security Trust Fund, the total indebtedness of federal, state and local governments is running around 85 percent, vs. 108.7 percent in 1946.

And even that doesn't tell the full picture, since chronic underfunding of contractual pension obligations has left a future budget hole in the trillions of dollars. Oh yeah, and entitlement spending gets more expensive by the nano-second.

The funny thing is, the rest of Johnson's column bolsters the theory that, well, we're in a fiscal crisis:

The financial system poses a major risk to our fiscal outlook over the next few years. Unless you think that the Dodd-Frank reform bill really ended "too big to fail" and the associated excessive risk-taking culture, you should worry a great deal about the assumption of boom, bust, bailout and fiscal damage that the Bank of England now refers to routinely as the "doom loop." […]

[W]e need to control health care spending as a percent of G.D.P. […] [I]n the projections, by 2030 or 2040, the growth of health care spending ruins us all — whether or not we get the government to pay for it.

Both sides of our political elite have contributed to the sense of fiscal crisis. And as we continue down this path — dangerous big banks, out-of-control health care spending, significant tax cuts, small changes in nonmilitary discretionary spending and irresponsible rhetoric on both sides — we are well on our way to a real crisis.

It's almost as if he thinks the medicine can only go down if at first you say to our delusional political class, "Look! The Goodrich blimp!"

Link via Scott Rosenberg. For a more hard-headed look at the mess we're in now, read (and follow the links from) Brian Doherty's piece yesterday.