The inability to spend beyond one's means -- the need to live within one's budget -- is economics' most fundamental law. It applies to entire economies as well as their household and government sectors. Official debt is presumed to signal government budget violations. But official debt measures only those obligations governments choose to label 'official'. Moreover, this labeling choice has no basis in economic science, whose equations don't direct their description.
Thus, official debt is a matter of linguistics, not economics. Any country's past, present, and future fiscal policy can be relabeled to produce any past, present, and future values of official debt. In short, government debt is no better grounded in reality than the emperor's new clothes. If official debt is a number in search of a concept, how should we assess a country's fiscal sustainability? Economics' answer is the fiscal gap -- the imbalance in the government's intertemporal budget. The US fiscal gap now exceeds 7 percent of annual GDP.
Closing the gap requires either raising all taxes by 26 percent or cutting all non-interest spending by 23 percent -- on an immediate and permanent basis. Such adjustments are politically infeasible. What can work is radical reform of healthcare, Social Security, taxes, and welfare.
- Organizer: Danish Institute for Advanced Study - DIAS
- Address: Fioniavej 34, 5230 Odense M
- Add to your calendar: https://eom.sdu.dk:443/events/ical/0d0c7ee8-633b-4ba4-97f8-31d408a1e1ac