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U.S. debt not sustainable

Niall Ferguson

TEXT OF INTERVIEW

Kai Ryssdal: The economic conversation that's happening in Washington right now, and that is likely to flavor this fall's elections, pretty much revolves around one word: Debt. How much money the country owes -- which is a lot. And whether now's the time to go deeper in the hole to help get the economic going again.

Economic historian Niall Ferguson has been blunt in his view -- that the amount of debt we're carrying simply is not sustainable.

Niall Ferguson: There is a fundamental imbalance between what we expect the federal government to spend on Medicare and Social Security and national security and what we're prepared to pay in taxation. And that is really the core of the issue. The Greeks found that out this year. My fear is that Americans may find this out next year or the year after.

Ryssdal: That quickly?

Ferguson: Oh absolutely, these things happen really dramatically, because when the bond market turns its blinker gaze in your direction and investors say, "You know what, lending these people money for 10 years in return for 3.2 percent a year isn't that smart. Maybe we should ask for a little bit more for the risk that we're taking." That's the kind of thing that happens very suddenly in international financial history.

Ryssdal: Let me ask you then to concentrate on the historian part of your economic historian professional identity, and go back and explain how it came to be that our economy runs this way.

Ferguson: Well, for most of the history of the United States, the federal government was a relatively small entity, and there was a time when it had no debt whatever. It's been since around 1979, 1980 that we've seen a sustained upward shift in the federal debt and that's come about I think because of politics more than economics. Increasingly, Democrats became committed to public spending and Republicans became committed to to cutting taxes. And this unholy alliance, if you like, between tax cutters and public spenders created a fundamental imbalance between what was being spent by the federal government and what was being raised in taxation. And now we find ourselves in a situation where a structural deficit has been combined with a cyclical deficit due to the financial crisis. And we are now looking at a very acute fiscal crisis -- the worst in American history.

Ryssdal: What might a sovereign debt crisis look like here? We know what it looks like with the Greeks. They eventually got bailed out. They had riots in the streets. What happens here?

Ferguson: Well, we have a little foretaste, because there is already a fiscal crisis in America and it's happening in the States. And what happens is that you find yourself actually having to cut public services and also raise taxes because you've reached the limit of your ability to borrow. If we find that 20 or 25 cents of every tax dollar that we pay is just going on interest payments, then you get into some very difficult choices. Do you put up taxes? Never very popular. Do you cut entitlements? These are the questions that are currently being asked at the state level. They will soon be having to be asked at the national level too.

Ryssdal: What do we do though? Is this the time to cut in the middle of a recession when still so many millions are out of work and the economy is struggling?

Ferguson: I think there's a false dichotomy here, where essentially the problem is phrased as follows -- either we need more stimulus or we need austerity. I wouldn't envisage fiscal tightening in 2010 or 2011, but we need to have a credible plan so that by 2020 we're not running trillion dollar deficits. And I'd like to hear it couched in the following form: We're going to reform the entitlements that are currently threatening to bankrupt the United States. We are going to introduce a federal sales tax or value added tax which would take some of the strain off the income taxpayers. It's a big bang reform that we need. So this is the third option: Not a further stimulus, not a ghastly austerity package, which could push us back into recession, but radical fiscal reform that creates a foundation for more rapid growth and therefore, for more job creation.

Ryssdal: Niall Ferguson of Harvard University. His most recent book is called, "High Financier:
The Lives and Time of Siegmund Warburg." Niall, thanks so much for your time.

Ferguson: Thanks, Kai.

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Just a small add on to the comments, mostly about 'cutting the two wars from the budget'

We're already leaving Iraq, and at as fast as we can. THAT part of the budget is on it's way out.

Afgan..well.. you remember how it took 4 years for us to stop doing it wrong and 4 years to do it right and get out (we're in year 3 and will be out by 2011)? Afgan is worse: we've been doing THAT one wrong for 7 years and just started to ask "how should we do this right?" The current action may not work but meh, I thought the Iraq Surge was a bad idea and that DID work. Still if it does it's still 4 years before we're done.

(why not leave now? Might want to remind yourself why we are in there in the first place and who would regain that land if we leave)

Aka, most of the Iraq spending is almost over. Afgan..not so much.

Most of the rest has been said pretty well in the comments. I will ask for ideas by others on how SS and Medi can be fixed without dumping a mass of elderly on already economically hurt families (which is the reason why SS/Medi exists in the first place).

Ken Schulz and James Regan are lunatics of unfathomable proportions. What planet do you guys live on?

In addition to his usual errors, Professor Ferguson seems to be confused about the finances of state governments in this country. Most all the states have constitutional provisions that require them to fund current expenditures from current revenues. The budget problems of the states are entirely due to the present severe recession, which has reduced their revenues substantially. This has nothing to do with 'reaching the limits of their ability to borrow'. One more point. When the bond investors say "we'd like a little more interest in return for the risk we're taking", the correct response is, "So?" In the real world, the investors have no leverage unless they have an alternative. If Professor Ferguson thinks they might next year or the year after, he might explain where else they could threaten to take their money. Sterling? The euro? As another commenter already pointed out, Japan pays even less for the use of their money, despite its far higher relative debt.

This commentary claimed "that's a false dichotomy," but then went on to perpetuate it. The trouble is that so-called stimulus is not in fact stimulative, and so-called austerity is not harmful to the economy if it takes the form of budget cuts. Cutting spending is *good* for the economy.

I found the interview interesting as it resonated with common sense. I found some of the comments downright scary. If suggesting we need a plan to repay our debts, and suggesting we can't live beyond our means indefinitely evokes such personal attacks, I fear we are doomed. I hesitate to to submit this comment lest I be judged a war-mongering oligarch.

Interesting to read Kai's interview with Niall Ferguson and then the many responses, most of which - in my opinion and to which I agree - were against Ferguson's orientation. I'm 73, and remember going through the end of the Great Depression, WW II and all the stuff since. What I see is Amrica's unwillingness to accept responsibility to pay for what it wants. During the early times, the natural resources gave our ancestors things not possible from the places they emigrated from. Eventually, this great resource dried up and now we need to get down to brass tacks like everyone needs to do. But we also have a bunch of oligarchs who never have enough and by investing a small part of their wealth in control of the media and government, have set the stage to get the rest of the populations back to something even worse than the serfs had in the Middle Ages when, at least, their Lords cared a little for them.

When one read Ferguson, it is too obvious that he favors keeping the Top Class right where they are; after all, aren't they probably giving him a little bit to convey to the rest of us the idea that they deserve it? But for what? It's just like the majority of jerks in our national legislature: they set their incomes and the American taxpayers give it to them. Then they stay in office IF they continue to kowtow to the oligarchs who pay their campaign expenses to keep them in office giving the oligarchs what they want. The John Boehners of this country have learned the magic trick of saying NO to anything proposed to help the Middle Class, yet a majority of that same Middle Class will vote for him because they tend to think that ONE DAY, they, too, will be a wealthy oligarch. This stuff gets instilled into us when we're less than 6 years old and seems never to go away.

Until some kind of Revolution will finally kill the entire present mess.

If anyone thinks otherwise, have Kai give you a convincing interview. But also tell him the stupidity of getting false news like Ferguson wants to expound.

Hmm... can the United States just declare bankruptcy? But, California, you get to go first and show the rest of us how it's done (no offense Marketplace).

The US debt is unsustainable. We need to cut whatever services needed to bring it back to a sustainable level. The idea of the government injecting money into the system to kick start it isn't working. The goverment is spending more and more money and going deeper and deeper into debt.

A democracy cannot survive when its citizens use the legislature to vote themselves benefits and money that are not essential to the running of the government.

As I listened to this interview (with my blood progressively getting closer to the boiling point), I kept waiting for Prof. Ferguson to get to the part about raising the personal income tax back to the levels that were in effect under Eisenhower (a Republican, remember?) -- but no, of course that wasn't one of the solutions he proposed.

It's interesting, isn't it, that he's chosen to live in the U.S. instead of staying in Scotland where he would have to pay higher taxes.

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