Okay, maybe not "steps", but rather categories of things one can do. Consider this a pop quiz. If the U.S. runs deficits year-in and year-out (because of low tax revenues relative to spending obligations), the debt will increase over time. How can this trajectory be changed?
I would argue there are actually four things that can be done. The first two are the most obvious:
1. reduce spending
2. raise tax revenue
The other two are things we have talked about a good bit in the course.
Number 3 could be seen as replacing one economic challenge with another. (Hint: think about the late 1970s.)
Number 4 is one that just doesn't get talked about as a "solution" to the long-term deficit and debt problem, but I think should be considered as part of the mix. It is also - interestingly - the policy area where there might be some bipartisan consensus after the 2012 election. Or least I argued as much in class the other day.
See what you can come up with...
5 comments:
As far as #4, would you be talking about immigration reform as a potential solution to the long-term deficit and debt problem? I could see this as a great way to broaden the payroll tax base. This would be an important component of solving some of our current problems with Social Security, for example. This chart (http://www.ssa.gov/history/ratios.html) shows the declining ratio of covered workers to Social Security recipients in the US, which has declined from roughly 40 in 1945 to 3 in 2010. This means there are much fewer workers today supporting each retiree. Perhaps expanding our workforce through immigration will create a younger base and thus, a more stable transfer system from current workers to retirees. That would be an important step in reducing our fiscal problems, as long-term entitlement spending (Social Security, Medicare especially) is one of the major concerns moving forward.
I agree with Joe, and as a Texan, I hope that immigration reform will be achieved in the coming years. Labor flow is an underrated source of potential economic solutions...discussion to be continued in class!
When thinking about the fiscal cliff there are two things that I always wonder about:
1. The FED holds around $1.6 trillion dollar in U.S debt. Despite it is an extreme solution to the fiscal cliff problem, 'burning' all of this debt is always an option. Is that right? I understand that this could have a major impact in the MS yet, is it still a possibility?
2. What would be the repercussions of taking a 'haircut'? I know that this would only get some breathing space and damage the reputation of U.S. debt as free-risk investments. To what extent would this damage the U.S. supremacy in the world?
I was thinking of inflation and immigration, as you suggested.
I am trying to think through the implications of Freddy's idea of the Fed writing down US Treasury debt. I am still trying to figure the accounting implications, but it seems to me a default by any other name. The implications for the money supply are interesting, because it would seem to me to be taking that much money out of circulation to leave the balance sheet intact (but the double-entry accounting majors will have to check that logic...).
Post a Comment