Spend Less, Owe Less, Grow the Economy

by Simon Johnson, Peterson Institute for International Economics

June 21, 2011

Main Points

  1. The United States needs to embark on a program of medium-term fiscal consolidation that will stabilize and, in the foreseeable future, bring down government debt relative to GDP.

     
  2. The precise limit on debt relative to GDP for the United States is not known and hard to estimate precisely given the reserve currency status of the US dollar, the nature of alternative reserve assets (the euro, Swiss franc, Japanese yen, and British pound), and the high level of savings around the world that official and private sectors want to hold in foreign currency.

     
  3. The best way to bring debt-GDP under control is to limit future spending increases and boost revenue while the economy continues to recover. In particular, health care spending needs to be credibly constrained. There is also a pressing need for tax reform – to reduce complexity, lower distortions, and in particular roll-back the subsidies for household and corporate debt that have crept into the system. Excessive private sector debts pose a significant systemic and fiscal risk to the economy.

     

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