Posted by: Dirk | May 25, 2016

Martin Feldstein on government debt does not make sense

This is from his column at Project Syndicate:

In the United States, the Congressional Budget Office estimates that the federal government debt doubled over the past decade, from 36% of GDP to 74% of GDP. It also predicts that, under favorable economic assumptions and with no new programs to increase spending or reduce revenue, the debt ratio ten years from now will be 86% of GDP.

The odd thing is: actual government debt to GDP for the US is 106% (source). So, if we go from 106% to 86% in ten years and the trend continues, then we’ll hit 6% in fifty years, which is 2066. How does that square with Feldstein’s first paragraph?

A major common problem that deserves their attention is the unsustainable increase in the major developed countries’ national debt. Failure to address the explosion of government borrowing will have adverse effects on the global economy and on debt-burdened countries themselves.

There is another odd scenario:

Even more worrying, the annual deficit ratio will double in the next decade to 4.9% of GDP, putting the debt on track to exceed 100% of GDP

I’m scratching my head here. Why will the deficit double? Are we still “under favorable economic assumptions”? Will 100+% still be lower than the 106% of today? This text needs further elaboration because as it stands numbers are pulled out like a rabbit from a hat. This spectacle leaves the reader wondering how scientific it is to claim to know where government debt to GDP ratios will be in 10, 20 or 30 years.

I completely disagree with the idea that there is too much government debt right now – there is not enough! After all, each US dollar of public debt is transformed into one US dollar of private net financial wealth, either in the form of treasury bonds (or bills or notes) or money. Government should spend to get rid of unemployment, and not cut spending in order to ‘stabilize public debt’.

Mixing euro zone countries with no sovereign currency with cases like the US and Japan is completely confusing. If you really want to understand government debt, you need to go through the balance sheets. I did the exercise for the euro zone, with my book coming out in September 2016. If the ECB keeps on buying euro zone government bonds on secondary markets, no euro zone government can go bankrupt. This is a political problem, not a technical one. In a modern monetary economy set up well, the risk of default on government bonds issued in domestic currency is zero.


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