Does The U.S. Really Have A Fiscal Crisis? (Baseline Scenario)
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By Simon Johnson
The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overindebted 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 US government debt. We are still seen as a safe haven.
Yet leading commentators and politicians today repeat the line “we’re broke” and argue there is no alternative other than immediate spending cuts at the national and state level.
Which view is correct? And what does this tell us about where our political system is heading?
Our main fiscal issues are three (see my testimony to the Senate Budget Committee earlier this month). The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-08. The ensuring recession and associated loss of tax revenue will end up pushing up our government debt, as a percent of GDP, by around 40 percent. Very little of this debt increase was due to the fiscal stimulus; mostly
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 boom-bust-bailout-fiscal damage scenario that the Bank of England now refers to routinely as the “doom loop”.
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