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U.S. debt not sustainable

Marketplace Staff Jul 27, 2010

U.S. debt not sustainable

Marketplace Staff Jul 27, 2010


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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