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Bond Market"The Debt Crisis Is Here": The Conference Board Is At It Again

“The Debt Crisis Is Here”: The Conference Board Is At It Again

The Committee for Economic Development (CED) of Conference Board recently put out “Explainer: The National Debt” which is pretty much a greatest hits of debt scare mongering. Other than the references to recent events and data, it is timeless: the authors could have put out the same report in any year since the mid-1980s and not much of the contents would have changed. Anyone who thinks that the MMT debate would improve things just needs to read the report to see that progress in conventional economics is largely illusionary.

The shtick of the “explainer” is that “the fiscal crisis is here.” The evidence is everybody’s favourite time series: the debt/GDP ratio (above).

I will immediately note that the United States does face a crisis: its ability to govern itself appears to have collapsed. Getting the budget process to work when one party of a two party system wants to burn the system to the ground is obviously difficult. What type of dysfunction the United States will have after November depends upon the electoral results (and whether a certain party would accept those results).

The “Analysis”

The report runs through the basics of fiscal policy, and the various categories of spending.

Comparing the national debt to GDP (Figure 5) produces a ratio that reveals the United States’ ability to pay down its debt. The debt-to-GDP ratio shows the burden of the national debt relative to the country’s total economic output and can provide greater context than looking at total debt numbers alone. Based on examples from international financial institutions, the recent past, and econometric analysis, CED recommends a public debt-to-GDP ratio of no higher than 70 percent as a stable and sustainable level of debt burden. The European Union requires member states to limit government debt to 60 percent of GDP as a condition for joining the euro, and a World Bank analysis finds 77 percent as the threshold at which debt begins to impede economic growth in developed countries. CED’s recommendation is roughly in the middle of this reference frame.

The CED thus declares the U.S. debt unsustainable based on (a) a number pulled out of the nether regions of Eurocrats and (b) a number from a report that undoubtedly reversed the causality between high debt/GDP ratios and low nominal GDP growth rates.

When we compare the magic “unsustainable 70% debt/GDP limit” to Japan’s history, we see an immediate problem. Of course, the authors of the report explain this as being due to high personal savings rates, and Japanese growth was slow. Given the rather low levels of JGB yields, it is hard to see how the debt levels impeded growth.

Yeah, The 1980s

What stands out to me is the following passage.

After the economic turmoil of the 1970s, President Reagan entered office in 1981 promising to tackle inflation and the budget deficit. While inflation did come down, the Federal government also ran high deficits because of tax cuts and significant increases in military spending that were not matched by cuts in other areas of discretionary or mandatory spending. Nevertheless, economic growth was relatively strong, which tempered the rise of the debt-to-GDP ratio in the 1980s to 39 percent of GDP by 1989.

If we look at the chart I provide at the top of the article, we get a somewhat different view of the debt/GDP situation in that era. The debt/GDP ratio hit its lowest level during the peak inflation period around 1980. Rapid nominal GDP growth crushes the debt/GDP ratio courtesy of how division works.

If we accept the MMT premise that the sustainability risk associated with fiscal policy is inflation, then the debt/GDP ratio is an anti-indicator: it falls when inflation rises.

Interest Costs

The discussion of interest costs also underlines the incoherence of conventional thinking: interest costs are rising because the central bank is raising rates because it wants lower inflation. Yet those rate hikes represent an inflation risk.

Outlook Is Concerning Because the U.S. Federal Government is Adrift

Hand-wringing about discretionary versus non-discretionary spending is just political cover for fiscal conservatives to demand cuts to the welfare state. To the extent that there is a fiscal problem, tax hikes are also a solution. The inability of the U.S. Federal Government to run a budgetary process in a sane fashion is always going to be an issue.

Fiscal policy was forced into extraordinary measures by the unusual nature of the pandemic. There was an inflationary bump — but no lost decade afterward. If fiscal policy is structurally loose, there might be future tightening measures needed. However, it is unlikely that the U.S. can approach that prospect in a sane fashion.

Concluding Remarks

It is very easy to respond to such reports by fiscal conservatives. They keep publishing the same report, and I keep publishing the same response.

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(c) Brian Romanchuk 2024


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