Friday, February 14, 2014

The Optimistic View of Our Fiscal State

I am a major doom-and-gloomer when it comes to the fiscal health of the USA.  I don't think our core fiscal problems are insurmountable, but I think we are destined for inevitable haircuts that will be painful throughout broad swaths of society.  Plus I think we are at a tipping point, where our fiscal profligacy can and will bite us in the ass in a very big way.  I have some respectable company in this regard.

Well, it is important to be cognizant of the other side of the argument.  IMHO the best blogger making the case that our fiscal position is not too bad is Scott Grannis.  Here is what Scott has to say:
Today Congress decided to suspend the debt ceiling until March 2015. Is that a big deal? No, because we no longer have a budget crisis. The federal budget deficit has fallen to a mere 3.3% of GDP, and that's not scary at all. If recent trends continue, the budget deficit could be less than $400 billion by the end of this year, and that would probably be only 2.5% of GDP.
Grannis is, however, not saying all is rosy, just that there is a way out, if we are wise enough to take it
The biggest problem we face today is that the economy is operating at only 90% of its capacity (see above chart). We need policies that grow the economy, and the best way to do that is to create incentives for the private sector to work harder and invest more. What better way than to slash corporate tax rates and marginal tax rates on incomes (which in many cases are approaching 50-60%)? It's almost a no-brainer, but hardly anyone gives tax reform a chance these days.
If you were going to take anyone's word for it, I'd take Grannis's (certainly over mine).  Still, we do agree on one thing - the supply-side of economic thought has been kicking the demand-side's, or Keynesianism, ass all over the playing field.  In the long run, that is a major positive of paradigmatic importance. 

Still, if you are under 45, don't count on receiving Social Security, make other plans.


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