Not since the second world war have so many governments borrowed so much so quickly or, collectively, been so heavily in hock. And today’s debt surge, unlike the wartime one, will not be temporary. Even after the recession ends few rich countries will be running budgets tight enough to stop their debt from rising further. Worse, today’s borrowing binge is taking place just before a slow-motion budget-bust caused by the pension and health-care costs of a greying population. By 2050 a third of the rich world’s population will be over 60. The demographic bill is likely to be ten times bigger than the fiscal cost of the financial crisis.
Will they default, inflate or manage their way out?
This alarming trajectory puts policymakers in an increasingly tricky bind. In the short term government borrowing is an essential antidote to the slump. Without bank bail-outs the financial crash would have been even more of a catastrophe. Without stimulus the global recession would be deeper and longer””and it is a prolonged downturn that does the greatest damage to public finances. But in the long run today’s fiscal laxity is unsustainable. Governments’ thirst for funds will eventually crowd out private investment and reduce economic growth. More alarming, the scale of the coming indebtedness might ultimately induce governments to default or to cut the real cost of their debt through high inflation.
[blockquote] Broadly, governments should pledge to clean up their public finances by cutting future spending rather than raising taxes. Most European countries have scant room for higher taxes. In several, the government already hoovers up well over 40% of GDP. Tax reform will be necessary—particularly in places, such as Britain and Ireland, which relied far too much on revenues from frothy financial markets and housing bubbles. Even in the United States, where tax revenues add up to less than 30% of GDP, simply raising tax rates is not the best answer. There too, spending control should take priority, though there is certainly room for efficiency-enhancing tax reforms, such as eliminating the preferential tax treatment of housing and the deductibility of employer-provided health insurance. [/blockquote]
Never happen. Politicians are elected through largess. Buy the votes now and let someone else worry about years later. You don’t get elected cutting the money you give to voters.
[blockquote] Yet nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care. America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasised control of costs as much as the expansion of coverage that Barack Obama rightly wants.[/blockquote]
I am with Br. Michael. There was an opportunity wasted. The “ginormous” money dump might have prevented another depression but at a cost of not dealing with the actual problems. For the most part, the same people are running the banks, the car companies, etc. No hard decisions will be made.
I would add the essay is a waste of words and print.
[blockquote]Without bank bail-outs the financial crash would have been even more of a catastrophe. Without stimulus the global recession would be deeper and longer …[/blockquote]
Not self-evident. Public spending and shifting policies [i]prolonged[/i] the Great Depression; in the Depression of 1920 — equally serious and deep — the Federal Government did nothing and the economy recovered in a year.
[blockquote]America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasised control of costs as much as the expansion of coverage that Barack Obama rightly wants.[/blockquote]
The “waste”, to whatever extent it’s present, is due entirely to the practice of “defensive medecine” by physicians — unnecessary and expensive tests, excessive use of Caesarian section, etc. etc. etc. — due to fear of malpractice suits. True cost control without bureaucratic interference, disastrous price controls, and all the rest, could be achieved easily with a draconian crackdown on such ambulance-chasers as Jon Edwards. With the Democrats in charge, of course, fat chance.