Brad DeLong offers a useful chart of the U.S. federal budget deficit, obviously the picture is grim.
All will be well, however, if the growth rate of the economy exceeds the real rate of interest (it is a little more complicated than this; Alex and I still cannot agree on the exact conditions required). In economic parlance, “g > r”. We could then simply grow out of our debt over time, here is some heavy lifting on the topic.
Now what is the chance of this rosy scenario?
My stab says 35 percent. g has exceeded r for a good bit of the last dozen years. But will high rates of productivity growth continue?
I guess a 20 percent chance that some catastrophic event, possibly related to terrorism, will bring the world economy to a crashing halt.
I guess a 20 percent chance that aging demographics will return our high rate of productivity growth to earlier levels.
I guess a 25 percent chance that our high rate of productivity growth will disappear for no discernible reason whatsoever.
That gives us a 35 percent chance of the rosy scenario. I once asked Daniel Drezner, Jane Galt, Alex, and Randall Parker their best guesses at the odds; now that was a fun conversation. But in the meantime, we are playing Russian Roulette with our future.
And if that doesn’t worry you, this article about our failing pension systems will.