Our financial system is crumbling this week.

[Hungary Jack]

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

I disagree on the last point, but whatever.

I see why, but look at California. I believe the state can not raise taxes without a vote. So California voters refuse tax increases, but always vote to pass legislation that increase government programs. Raising taxes is almost always political suicide. Obama could balance the budget, but if there were tax increases across the board he and the dems would be slaughtered in the next two elections. So it's their fault for not being willing to take the bullet, but I blame the voters for wanting lower taxes in the wake of record deficits.

You are right. California's plebiscites mandate new spending programs, but they have already handcuffed the legislature with previous things like Prop 13. It's an unsustainable legislative process.

But our federal government does not have these restrictions. So while it's politically unpopular to raise taxes or cut spending, it is certainly possible. I think it takes much stronger leadership than we have had in quite some time.

My fear is that ultimately, only the bond markets can hold our federal government accountable for its fiscal suicide, and when that day comes it's going to be really, really ugly.

[vinsanity]

But our federal government does not have these restrictions. So while it's politically unpopular to raise taxes or cut spending, it is certainly possible. I think it takes much stronger leadership than we have had in quite some time.

My fear is that ultimately, only the bond markets can hold our federal government accountable for its fiscal suicide, and when that day comes it's going to be really, really ugly.

This isn't meant to be an accusatory comment, I'm not making an assumption on your political affiliation or belief on a topic. It's purely an academic question.

The government should do what's best for the country against the wishes of the people (raise taxes), but that same argument was used as a reason why health care reform shouldn't move forward?

I guess what I'm saying is, either we have to elect people we believe to make decisions better than we can or take responsibility for the faults of our politicians. Voters seem to be dazzled by big terms they don't understand - communism, socialism, conservative, liberal etc etc. Maybe a better leader could sell higher taxes to the people.

[Arthur Dent]

Man, these stupid deficit scare stories are really tiresome. As per usual with the genre, this one is garbled. Let's start at the beginning with the baseless comparison to Greece:

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

Why are we comparing Greece's debt level today to projected debt levels (assuming no changes in policy) twenty years from now? Left unmentioned are the current debt level of US debt (less) and Greece's projected future debt even with austerity measures (more). Greece faces a long term structural deficit much larger than the U.S., is deeper in the hole already, and faces bigger problems making an adjustment.

Moving along to Leonhardt't explanations on the origin of the deficit, he again gets it wrong:

As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt.

A public desire to increase government services has almost nothing to do with the deficit. The one aspect of it you might put in that category is the Republican prescription drug benefit for Medicare which was debt financed and implemented in corrupt fashion so as to overpay drug manufacturers. But this is not the major source of the deficit. In the short term, it's primarily a result of the recession, and in the long term it's primarily due to the fact that we pay way more for health care than other countries. There is also the matter of the Bush Tax cuts which were never sustainable.

So yes, an adjustment will be needed, but the Chicken Little stuff is not. Returning to 90's era tax rates, and getting health care costs down to levels comparable to other advanced countries would go most of the way. If we don't control the growth of these costs, we would be screwed even if the government spent nothing on health care. And in any case, the growth of these costs has nothing to do with politicians running wild on the credit card, and everything to do with dysfunctions in the private health system.

[Arthur Dent]

My fear is that ultimately, only the bond markets can hold our federal government accountable for its fiscal suicide

Apparently, bond investors are not so worried about our "suicide" as you are. They continue to lend money to the government for 10 or 30 years for quite moderate interest rates.

[Hungary Jack]

My fear is that ultimately, only the bond markets can hold our federal government accountable for its fiscal suicide

Apparently, bond investors are not so worried about our "suicide" as you are. They continue to lend money to the government for 10 or 30 years for quite moderate interest rates.

Yes the buyers of our t-bills and long bonds are confident in the competitiveness of the US economy, but this does not mean that their sentiments cannot change. In which cases bond prices collapse, rates go way up, and suddenly the cost of new borrowing and rolling over federal debt skyrockets. It's not plausible, but it is conceivable.

And debt is debt, regardless of how its financed and how the proceeds are used. Using debt to finance consumption (vs. capital investment) is unsustainable, yet that is what our government has been doing for decades. Gross debt as a % of GDP has grown from 33% in 1980 to 98% (estimated) today. And these figures don't include nearly $5 trillion in obligations held by Fannie and Freddie.

This is not recession-driven cyclical debt. The 1980 -2010 period has seen remarkable growth in the US economy, and even more remarkable growth in federal spending.

So yes, higher taxes and controlled health care spending will go a long way toward reversing the current trajectory. Just let me know when that is going to happen

[Arthur Dent]

This is not recession-driven cyclical debt.

No, mostly it is not. But the current large deficits certainly are. And in any case, the accumulated debt isn't related to out of control spending either. It's been caused by unfinanced tax cuts. I agree that these tax cuts were irresponsible, but I do think this whole story about the debt gets way more attention than it deserves. Even now, after being irresponsible during much of the time since 1981, we're still in better shape debt-wise than a lot of other countries.

Edit:

Total federal spending as a fraction of GDP:
1981: 21.7%
2009: 22.0%

Is this the remarkable growth?

[Hungary Jack]

This is not recession-driven cyclical debt.

No, mostly it is not. But the current large deficits certainly are. And in any case, the accumulated debt isn't related to out of control spending either. It's been caused by unfinanced tax cuts. I agree that these tax cuts were irresponsible, but I do think this whole story about the debt gets way more attention than it deserves. Even now, after being irresponsible during much of the time since 1981, we're still in better shape debt-wise than a lot of other countries.

Edit:

Total federal spending as a fraction of GDP:
1981: 21.7%
2009: 22.0%

Is this the remarkable growth?

It's remarkably consistent.

Seriously, I just don't have as a sanguine view of our fiscal situation as you do. Maybe it's rooted in having fiduciary responsibility for a small business where all financing comes through cash flow, and having had cost center responsibility in a much larger organization.

And comparing our debt situation to that of other countries is a false God. I'll admit that the Greece comparison is a weak one because the Greek economy is one where workers expect to retire at 50 and the country's main exports are olives, feta cheese, and Mediterranean sun tans. It is essentially a third world economy tied to a first world central bank.

[Hungary Jack]

Interesting piece in today's WSJ examining Hauser's Law, which essentially says that historical data strongly suggest that federal tax receipts will always fall just short of 20% of GDP. Keep taxes too low and revenue falls. Raise taxes too high and the economy slows, loopholes get exploited, and receipts lag.

In other words, increases in federal tax rates, especially higher marginal rates, do not produce additional revenue. Despite a variety of tax regimes over the past 80 years, federal receipts have approached but never exceeded 20% of GDP. The tax base, like an organism, responds to changes in tax law by adjusting itself, thanks in no small part to our convoluted tax code.

[vinsanity]

Interesting piece in today's WSJ examining Hauser's Law, which essentially says that historical data strongly suggest that federal tax receipts will always fall just short of 20% of GDP. Keep taxes too low and revenue falls. Raise taxes too high and the economy slows, loopholes get exploited, and receipts lag.

In other words, increases in federal tax rates, especially higher marginal rates, do not produce additional revenue. Despite a variety of tax regimes over the past 80 years, federal receipts have approached but never exceeded 20% of GDP. The tax base, like an organism, responds to changes in tax law by adjusting itself, thanks in no small part to our convoluted tax code.

Interesting premise, Adam Smith would likely agree.

[Hungary Jack]

Interesting piece in today's WSJ examining Hauser's Law, which essentially says that historical data strongly suggest that federal tax receipts will always fall just short of 20% of GDP. Keep taxes too low and revenue falls. Raise taxes too high and the economy slows, loopholes get exploited, and receipts lag.

In other words, increases in federal tax rates, especially higher marginal rates, do not produce additional revenue. Despite a variety of tax regimes over the past 80 years, federal receipts have approached but never exceeded 20% of GDP. The tax base, like an organism, responds to changes in tax law by adjusting itself, thanks in no small part to our convoluted tax code.

Interesting premise, Adam Smith would likely agree.

Too bad Smith didn't have the data available to him then. He probably would have taken a long hard look at taxation and how it alters behavior.