“Biden’s plan will almost certainly make the deficit worse. Though the plan contains various tax increases to fund its programs, the taxes are likely to fall well short of government outlays, economists say.”
Have you been alarmed by the size and speed of spending by the government over the last few months? Unfortunately, it’s worse than you probably thought.
When people start mentioning the nation of Greece in the same sentence as the United States, you should be worried.
It’s easy to lose track when trillion-dollar spending packages are flying by us in real-time. But at some point, we will feel the effect of this.
Jon Miltimore writes at the Foundation for Economic Education:
The US Government’s Debt-to-GDP Ratio Is Worse Than Greece’s Before the 2008 Crash (And It’s About to Get Worse)
President Biden on Wednesday pitched a new plan to Americans before a joint session of Congress: more spending.
The just-released $1.8 trillion plan, presented just weeks after Biden signed a $1.9 trillion in COVID relief spending into law, includes “free” community college as well as universal preschool for all three and four-year-olds.
“Mr. Biden could usher in a new era that fundamentally expands the size and role of the federal government,” The New York Times reported.
How Much Debt Is Bearable?
The announcement comes months after the Congressional Budget Office released a report projecting a $2.3 trillion deficit in 2021.
Biden’s plan will almost certainly make the deficit worse. Though the plan contains various tax increases to fund its programs, the taxes are likely to fall well short of government outlays, economists say.
“The laws of economics are more rigid than the laws of the federal government, and these tax hikes are unlikely to yield the windfall Biden expects,” Joshua Jahani, the managing director of Jahani and Associates, noted in a recent NBC News article.
This is where Miltimore mentions Greece, and your ears should perk up:
There is a school of thought that suggests these debts pose no serious risk. After all, in theory, a government can roll over its debt indefinitely. However, in a recent article for the Federal Reserve Bank of St. Louis, economist David Andolfatto noted that ultimately the government doesn’t decide how much debt is bearable. The market does.
“There is presumably a limit to how much the market is willing or able to absorb in the way of Treasury securities, for a given price level (or inflation rate) and a given structure of interest rates,” Andolfatto wrote. “However, no one really knows how high the debt-to-GDP ratio can get. We can only know once we get there.”
A Dangerous Level of Debt?
Andolfatto is right that no one really knows the debt tipping point. But it’s worth noting that the US debt-to-GDP ratio—essentially a country’s debt compared to its annual economic output—was 129 percent at the end of 2020. In other words, the official US debt was nearly a third larger than the entire US economy.
That is considerably higher than Greece’s debt-to-GDP ratio in 2010, when it received a bailout from the International Monetary Fund to avoid defaulting on its obligations.
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