Is America on the Verge of a Debt Crisis?

A recent report from the Congressional Budget Office showed how dire America’s fiscal situation is becoming.

The aforementioned report highlighted a massive increase in government spending for 2020 due to the Wuhan virus.

The CBO report highlighted how large spending is relative to the overall economy:

Outlays in 2020 are projected to be about 50 percent greater than spending in 2019, equaling 32 percent of GDP—the highest since 1945. In CBO’s projections, they decline to 23 percent in 2030, still well above their 50-year average. Revenues are estimated to equal 16 percent of GDP in 2020. After falling slightly next year, they are higher thereafter, reaching almost 18 percent of GDP by the end of the projection period.

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However, economist Dan Mitchell raised a good point about the U.S.’s spending problems. It’s not just confined to this year, the CBO has 30-year projections that show how spending and taxes are expected to grow as a share of the country’s total economic output. The chart can be viewed here.

Mitchell cited the case of Greece and how its high tax and big spending policies accelerated its debt crisis during the Great Recession. The economists highlighted how these kinds of crises are kicked off  “when investors suddenly stop buying government bonds because they think there’s a risk of default (which happens when a government is incapable or unwilling to make promised payments to lenders).”

Nations with high debt loads could potentially major problems such as paying higher interest rates, larger tax hikes, and sharper reductions in economic output.

However, the topic gets more nuanced when comparing countries debt loads. Mitchell offered some food for thought when he juxtaposed countries such as Japan and Argentina:

Japan has an enormous amount of debt, yet investors don’t think there’s any meaningful risk that Japan’s government will default, so it is a “low” debt nation for purposes of the above illustration.

By contrast, there’s a much lower level of debt in Argentina, but investors have almost no trust in that nation’s especially venal politicians, so it’s a “high” debt nation for purposes of this analysis.

The economist is of the opinion that the U.S.’s case resembles Japan. In 2019, Mitchell argued “We probably won’t even have a crisis in the next 10 years or 20 years.”  He still holds the view even with the spending bonanza taking place during the Wuhan virus pandemic.

Nevertheless, the U.S. should still try to get its fiscal house in order and make genuine efforts to cut spending on welfare and defense programs. Future generations should not be held responsible for the fiscal profligacy of their predecessors.

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