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When will America face a fiscal crisis?

People talk a lot about the possibility that America might face a debt crisis sometime in the future, but "sometime in the future" is the sort of vague timetable that allows folks to pretty much ignore the problem. Over at Forbes, Bruce Bartlett tries to drill down and produce a solid estimate: He thinks it'll happen when interest payments on the debt hit 20 percent of revenue and the ratings agencies downgrade us, and according to the CBO, that should be in 2019 or 2020. But he also thinks the CBO's numbers are too optimistic, so we're likely to face this a bit sooner. Great.

By Ezra Klein  |  May 21, 2010; 2:55 PM ET
Categories:  Economic Policy  
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Not 20% of GDP, 20% of federal revenues.

And the reason he thinks CBO is optimistic is that he supports immediate increases in interest rates to fight inflation.

Seriously, Ezra, is this a guy you should be citing without skepticism?

Posted by: BobN1 | May 21, 2010 3:13 PM | Report abuse

Why is it so much easier for these folks to get all exercised about debt crises that will hit in 10 or 20 years, but not about climate change crises that will hit in 10-20-30 years?

Could it be that the measures that they believe should be taken wouldn't really be faced by them in the former case (unless Congress really tries to raise taxes on the wealthy) but might in the latter case? Or is it just the greater familiarity of the former crisis?

Posted by: Mimikatz | May 21, 2010 3:18 PM | Report abuse


In Bartlett's article, he mentions that ~70% of U.S. debt has a 0-5yr maturity. The truth is we don't know what inflation will be a few years down the road. Yes, the economy isn't all that strong right now, but remember we were able to generate double digit inflation in the late 70s, just a few years after the nasty 1973-1975 downturn. If core inflation is running at 3-4% in 2013 then it isn't so much of a stretch to think the Fed could be back at 6% and the 10yr Treasury at perhaps 7%. Three years is a long time (consider the consensus attitudes on inflation/deflation between the summers of 2003 and 2006).

Also, Bartlett takes at face value the CBO projection which assumes a record 11 year expansion 2009-2020. In all likelihood (and I would definitely bet 5:1 odds on this), there will be a recession during the forecast period. While interest rates will likely fall during the recession, that fall is likely to be temporary and the deficit is bound to rise by several percentage points of GDP. If you have a 2015 recession, you add on quite a bit of recession-related debt and by 2018 or perhaps 2020 interest rates are high again.

Also, if the stagnation/deflation arguments are indeed correct, then the real GDP growth expected by Obama/CBO isn't likely to materalize, and deficits/debt will be higher than projected. There are a lot of ways to get there from here, and in any case using the CBO numbers you have a fiscal crisis by 2019 or so under the base case.

I think Obama should make a good faith attempt to propose a mix of tax increases and spending cuts that fixes the structural deficit (so that the 2018-2020 budgets balance when unemployment is back at 5%), and yeah Congress might well ignore it and it might not be popular but at least someone with real authority will have tried to get the ball rolling on this issue.

Posted by: justin84 | May 21, 2010 4:13 PM | Report abuse

Inflation: the silent, invisible killer!

Posted by: bdballard | May 21, 2010 4:24 PM | Report abuse

I'm thinking we will need a period of divided government in order to tackle entitlement reform and tax changes; both parties will have to share the political costs and benefits, and when one party controls both houses and the presidency, it's too easy for the other party to avoid responsibility and demagogue the issues.

Posted by: jduptonma | May 21, 2010 4:29 PM | Report abuse

This week there was an article by an economist that went through the data on the economy, and came to the conclusion that we were in much better shape than all the doomsayers fear. Was that the Bartlett article? I read the economists essay this week online and it gives an optimistic view of our future economic situation. Can you find it and comment on it? I'm on information overload and can't seem to remember where I saw it.

Posted by: jjj5819 | May 21, 2010 4:55 PM | Report abuse

As per my comment/question above -- the economist challenged all the standard, accepted assumptions and came to a very different conclusion. I see that it wasn't Bartlett's article.

Posted by: jjj5819 | May 21, 2010 4:59 PM | Report abuse

Here is the linchpin of Bartlett's argument:

"The CBO forecast seems very unrealistic to me if only for one reason--it doesn't take account of the inevitable monetary tightening that the Federal Reserve must begin fairly soon. While it has said that monetary ease will continue for some time to come given the state of the economy and continuing downward pressure on prices, the Fed knows that it cannot wait too long before tightening lest inflationary expectations take hold that are very hard and very painful to eradicate. It is not going to give up its hard-won credibility as an inflation fighter easily."

As Paul Krugman points out:

There is in fact no basis for the Fed to begin monetary tightening "fairly soon". Obama's reappointment of Bernanke may have insured that the Fed will indeed choke off the recovery too soon, but there is nothing inevitable about this. It's bizarre that we're worrying about inflation when the core rate of inflation just hit a 44-year low and 10-year Treasury bonds are selling at just over 3 percent. Who cares what Glenn Beck's goldbugs think?

Posted by: jimclark1 | May 21, 2010 8:01 PM | Report abuse

Really it just depends on whether we pick Republicans or Democrats. With Democrats we turned record deficits into record surplusses in just two terms. With Republicans we turned it back to record deficits in just two terms.

You don't want a debt crisis then don't vote for the party of debt.

Right now with a severe demand crunch recession it makes sense in the short term to run deficits, but long term, Obama has trimmed trillions from our debt by passing health care reform over unanimous Republican opposition, and will trim trillions more by not extending the Republicans tax cuts for the rich.

Posted by: RichardHSerlin | May 22, 2010 12:22 AM | Report abuse

Bruce Bartlett is an opportunist.

He seems to write books about the latest economics-related disaster or economics hero figure, whatever happens to be in vogue.

If gold collapses tomorrow or Obama becomes an economic God, he'll then write a book about that, to ride that popularity wave and profit from all the current sensation.

He probably doesn't believe anything he writes, just so long as he can sell his books.

I wouldn't take stock in people like him. I would stick to more learned and respected figures instead.

Really Ezra, with posts like this one you transition into a conspiracy theorist and feed into the mass hysteria of misinformed people who nevertheless threaten self-fulfilling economic prophecies.

This kind of post I expect to see at the fringe site (or from emotionally driven people like me from time to time), not from someone who is supposed to be at the forefront of journalistic analysis.

Posted by: Lomillialor | May 22, 2010 6:52 AM | Report abuse

Amazing how powerful the ratings agencies remain after cashing in on their late credibility.

I'd say the USA doesn't have to worry much about ratings downgrades, so long as Congress is debating reform of regulations related to ratings. The ratings agencies are (modestly) profitable largely because prudential regulations explicitly refer to them.

"That's a nice Nationally Recognized Statistical Rating Organization you have there. It would be a shame if something were to happen to its national recognition. Oh but I interrupted you as you were discussing downgrading Treasuries. Why were you even thinking of doing such a thing ?"

Posted by: rjw88 | May 22, 2010 9:11 AM | Report abuse

Bartlett's comments make no sense for a couple of reasons.

First, the dollar is the currency of last resort. If this safe-haven disappears via a rating downgrade, it means that both gold and mattresses are rising in value.

Second, Bartlett posits that interest rates will rise. Of course, that's likely to happen, but in such a case aggregate demand will also rise, resulting in an increase in tax revenues. Of course, interest rates could also rise because of inflation, in which case the federal debt will, in real terms, fall.

Posted by: sltax1 | May 23, 2010 6:12 PM | Report abuse

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