Cutting-Edge Leadership

The best in current leadership research and theory, from cultivating charisma to transforming your organization

Is There a US Fiscal Crisis? No, and Here's Why

High school economist, George Liu, explains why the US has no fiscal crisis.

My guest blogger is George Liu, a high school student from Los Osos High School in Rancho Cucamonga, CA.  I met George at a TEDx event, and was impressed with his economic analysis of the U.S. economy.  Here is his explanation of our current economic situation, which leads to his conclusion that there is no U.S. fiscal crisis.  It should give us all a psychological uplift!

In today’s politically charged climate, leaders often prioritize partisan ideology over reality. The problem with this is that ideology is stubbornly “one-size-fits-all” constant whereas reality is ever-changing. The debate over the fiscal health of the U.S. highlights just such a problem; many prioritize the ideology of “small government” and demand the United States pursue a policy of fiscal austerity. Recently, Congressman Paul Ryan declared that “I don't think that the president actually thinks we have a fiscal crisis.”

In reality, the president shouldn’t, because the United States isn’t even close to a fiscal crisis. A fiscal crisis would signify, among other things, that the U.S. has trouble finding loans, is suffering from a chronic debt burden, has a spending problem, and could potentially default.

Find a Therapist

Search for a mental health professional near you.

None of these conditions are true.

First of all, the U.S. has no trouble obtaining loans. There is so much worldwide investor confidence in the financial health of the U.S. government that for the past 20 years, the government’s cost of borrowing has been negative in real terms. This means that investors are effectively paying to lend money to the government. Moreover, in the past few months, interest rates the U.S. government pays on its bonds (inversely correlated to investor demand) have dropped to historically unprecedented lows. Not even a downgrade of the U.S. credit rating by Standard & Poor has dented worldwide enthusiasm for U.S. debt; since then, demand for U.S. government bonds has been stronger than ever. The United States is not in a fiscal crisis if it costs the government less to borrow money from investors than it does to tax its citizens.

The U.S. does not have a spending problem either. Fiscal hawks point to the trillion-dollar deficit the U.S. government has run in the past five years as a sign the U.S. government is on a spending binge.

Actually, not quite. Put into context in comparison to previous federal government expenditures, spending growth has stabilized in recent years.

The U.S. has had a constant rate of growth with a constant slope. Growth in spending has significantly slowed down in recent years under the Obama administration after steady increases since 2000. Over Obama’s four budget years, federal spending is on track to rise from $3.52 trillion to $3.58 trillion, an annualized increase of just 0.4%.

Moreover, the U.S. will never default. U.S. dollars are not pegged to other currencies or backed by gold.This system of fiat currency means the U.S. government has full control of the U.S. dollar. The U.S. federal government can print infinite amounts of U.S. dollars to repay its debts at practically no cost, something that makes the United States exponentially more resilient to default than countries that don’t have control of their own currencies, such as Greece. Heck, even Greece hasn’t defaulted yet.

 As a sidenote, any inflation that does result from the U.S. simply printing more money to pay off its debts could actually be beneficial. Although any rampant inflation will be checked by the dollar’s status as the reserve currency of the world, mild inflation/inflationary expectations would boost our economy. Inflationary expectations encourage consumers to spend while inflation increases the competitiveness of our exports. Inflation, at 1.7%, is not a problem right now.

Finally, the U.S. has no debt problem. As shown in a recently released analysis of the U.S. debt-to-GDP ratio, the Center on Budget and Policy Priorities has found out that, factoring in the fiscal compromise (orange line), the debt-to-GDP ratio for the U.S. is only expected to be about 6% higher in 2022, which is not a problem by any means.

Moreover, countries that control their own currency can afford to run up much higher debt-to-GDP ratios than countries that don’t control their own currency. For example, Japan has the highest debt-to-GDP ratio of any country in the world with an approximately 230% debt-to-GDP ratio. Yet its continuing massive stimulus policies, and investors have flocked to invest in Japan. Japan’s 10-year bond yield rate recently fell to 9 year lows and until recently, the Japanese yen was so strong due to surging investor demand that it was crippling Japan’s export economy.

However, there is some truth to Congressman Ryan’s statement. There is a crisis at hand, except it’s actually one Congressman Ryan is propagating: an austerity crisis. The United States federal government should not pursue fiscal tightening during a recession. Moody’s Analytics estimates that U.S. fiscal austerity has subtracted from growth in 2011 and 2012 and is expected to cut 2013 growth by 1 percent. U.S. GDP in the fourth quarter of 2012 actually contracted 0.1 percent due to government spending cuts.

U.S. federal government spending, from infrastructure improvement to unemployment benefits, has worked in sparking the sluggish economy through boosting aggregate demand; in 2009, expansionary fiscal policy added about 2.7 percentage points to what the economy’s growth rate would have been. Moreover, spending will actually strengthen the U.S. long-term fiscal position through creating jobs and raising incomes, leading to not only an economic recovery but also higher tax revenues for the government. According to Larry Summers, an increase of just 0.15% in the GDP growth rate maintained over 10 years will reduce the U.S. debt-to-GDP ratio in 2023 by 2.5 percentage points.

 The United States needs growth during this recessionary economic climate, not the destruction of growth through the implementation of austerity measures. Congressman Ryan’s pursuit of spending cuts does have merit, but only when the economy has fully rebounded. Unfortunately, the economy has not fully rebounded. Fortunately, the United States does not have a fiscal crisis. The federal government should act accordingly.

Read more of George' analyses here:

http://seekingalpha.com/author/george-liu/articles

 

 

Ronald E. Riggio, Ph.D., is the Henry R. Kravis Professor of Leadership and Organizational Psychology at Claremont McKenna College.

more...

Subscribe to Cutting-Edge Leadership

Current Issue

Love & Lust

Who says marriage is where desire goes to die?