On the Debt Deal and the unBBA

TIME has five economists react to the debt deal, Mohamed El-Erian, Douglas Holtz-Eakin, Simon Johnson, Stephen S. Roach and yours truly.

Holtz-Eakin really works his apocalyptic imagery:

The river of entitlement red ink courses through a broken budgetary landscape. America is borrowing $58,000 every second—more than the median income of its households—and the gross debt already exceeds the level (90% of gross domestic product) that has historically been seen as toying with danger. Even worse, the federal debt promises to explode in the next decade, which will surely result in a Greece-style debt crisis. Erskine Bowles, co-chair of the President’s fiscal reform commission has called it the “most predictable crisis in history.”

When the crisis inevitably arises, the painful memories of 2008—panic; no credit; monthly job losses in the hundreds of thousands; Main Street businesses shuttering their windows and closing their doors; highly-qualified college graduates despairing of ever finding real work—will seem quaint and mild by comparison.

Stephen S. Roach wonders what will happen as China rebalances.

For China, the fiscal crisis and Great Recession was a wake-up call — a signal to rebalance away from unsustainable external demand toward untapped internal consumption. Such efforts now appear to be underway. And that’s where it comes full circle. China, the world’s biggest surplus saver, gets it. It will now save less and consume more. Conversely, the United States, with world’s biggest savings deficit, doesn’t get it. At least, that’s the message to take from the disappointing outcome of the debt ceiling debate.

…Absent the Chinese buyer of Treasuries, who will step up and fill the void? And on what terms? That latter point is key. With increasingly skittish foreign lenders now likely to require concessions in the form of a weaker dollar and higher U.S. interest rates, there will be new pressures on U.S. inflation and growth.

The timing of Roach’s comments are odd since interest rates are falling madly. On the other hand, the Chinese credit rating agency did just downgrade US debt.

I discuss the virtues of an unbalanced budget amendment. I won’t repeat what I wrote earlier but here are a few added remarks:

The idea of an unbalanced budget amendment is not new. Sweden’s government has been required since 2000 to budget for a 1% surplus over the business cycle. Since implementing their unBBA, Sweden has successfully brought their budget into balance and created a surplus.

Even more ancient sources are supportive of an unBBA. In the Bible, Joseph doesn’t advise the Pharaoh to balance the budget instead he tells the Pharaoh, save during the seven fat years so you are prepared for the seven lean. An unbalanced budget amendment reflects this simple and ancient wisdom.

For more, Ed Dolan has a good post on Sweden’s fiscal rules. See also this IMF paper for an extensive look at fiscal rules around the world. A hat tip to Ennuigogo.


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