The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overly indebted countries typically have a hard time financing themselves when the world becomes riskier — yet turmoil in the Middle East is pushing down the interest rates on United States government debt. We are still seen as a safe haven.
Nonetheless, leading commentators and politicians repeat the line “we’re broke” and argue that there is no alternative to immediate spending cuts at the national and state level.
Which view is correct? And what does this tell us about where our political system is heading?...
The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-8. The ensuing recession and associated loss of tax revenue will end up increasing our government debt, as a percentage of gross domestic product, by around 40 percent. Very little of this debt increase was due to the fiscal stimulus; mostly it was caused by lower tax revenue, because of the slump in output and employment.
In other words, we have a revenue problem created by the loss of tax receipts due to the recession and unemployment...NOT A SPENDING PROBLEM.
As I've said before, the Republican House plan to cut $62 billion in federal spending is projected to reduce GDP growth by 1.5-2% and eliminate 1 million jobs. That is either stone-cold stupidity or careless political calculation given our current economic situation.