Naked Economics: Undressing the Dismal Science pdfdrive com

Can America get its fiscal house back in order? The United States is the
world’s largest debtor. We owe Chinese bondholders more than a trillion dollars.
We’ve had to borrow heavily to pay our bills for the past decade. The sobering

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part is that some of our most significant government expenses lie ahead as the
Baby Boomers retire and begin to claim Social Security and Medicare. The
“peace dividend” at the end of the Cold War lasted about 45 minutes, so we
seem stuck with large defense budgets for the foreseeable future. The financial
crisis imposed a large fiscal cost; tax revenues fell at the same time the
government was spending more. When the economy recovered, it was a good
time to get the finances back in order—except that we passed a large tax cut
instead, adding about a trillion dollars to America’s already substantial national
debt. Math is math; every reasonable calculation I’ve seen shows that our fiscal
trajectory is unsustainable.
So what will we do about it? U.S. society has developed not merely an
aversion to higher taxes, but a palpable hostility. That would be fine if we were
willing to trim government to a size that we could fund. But we haven’t done
that either.
Think about what that means. Going forward, somehow we have to raise
enough revenue to (1) pay for whatever government we choose to have, which
we aren’t doing fully now; (2) pay the interest we’ve accumulated on past bills;
and (3) pay for the new expenses associated with an aging population and
expensive entitlement promises.
That’s going to require serious political leadership and recognition by
Americans that the status quo is not an option. Simon Johnson, who had plenty
of experience with financial crises as the former chief economist for the
International Monetary Fund, has noted, “Overborrowing always ends badly,
whether for an individual, a company, or a country.”
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During the first decade of
the new millennium, three parties borrowed heavily: consumers, financial firms,
and the U.S. government. So far, two have paid a huge price for that leverage. Is
there another shoe to drop?