US debt ceiling

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The dealing over raising the US debt ceiling continues, with the Republicans refusing to countenance tax increases and the Democrats baulking at cuts to social programs, and negotiations again breaking down. The two sides seem too far apart to reach a compromise by August 2, at which point the US would formally default (before Greece?!). How did the US get into such a mess? In 2000 Federal receipts were 20.6% of GDP and outlays were 18.2% of GDP. Clinton left Bush 2 a healthy surplus and declining public debt, if also some looming problems in the economy. By 2004 receipts were down to only 16.1% of GDP. Yes the US suffered from recession in 2001, but 2004 is far enough down the track that receipts ought to have recovered. But Bush combined tax cuts and concessions with spending increases, so that outlays rose to 19.6% of GDP in that same year. So much for smaller government under the Republicans.

By 2007 receipts had crept back up to 18.5%, still 2% of GDP less than at the end of Clinton, but of course the GFC has blown all of this out of the water. I’m not neccessarily a fan of sovereign wealth funds, but it does make sense to balance the books when the economy is doing well. Loose monetary AND fiscal policy from 2003 or so until the GFC sowed the seeds for the GFC and for the looming US fiscal disaster.

How will this unravel? There are a large number of papers from the early 1990s (Dornbusch, Sachs, Pereira and others) arguing that populism in Latin America leads to large budget deficits, inflation, and balance of payments problems. Alas this disease has now migrated north, and the populists in the Tea Party are promising balanced budgets on tiny taxes. At least our former PM had the courage to state that Australia was heading towards being a banana republic. The US is now nearly there.

4 Responses to "US debt ceiling"
  1. That would work. Pessimists on Quantitative Easing in the US say that this will be the outcome, but the size of the QE and the weakness in the US economy do not suggest that inflation is an imminent risk.

  2. The whole debate on debt ceiling in the US is a big sham and a populist move to hypnotize conservative vote base. During Bush administration, debt ceiling has been raised ten times since 2001 and therefore nothing stops them from raising it 11th time. 

    It is unfortunate that instead of working on addressing real economic problems, congress (especially House) wants to deliver a melodrama to unseat Obama in 2012 elections because that seems to be their highest priority. 

  3. There is an easy way out, but can you see the US Government finishing their useless wars and saving all that money? Not going to happen now, the military-industrial complex is firmly in charge.

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