There is a lot of talk about the exploding debt to GDP ratio of the United States government. In fact, the situation is dire around the world, with major governments like Japan sitting on mountains of debt. The official Chinese debt to GDP ratio is most likely misleading because it does not include debts of provinces and other government obligations. It is not clear if the official figure includes Chinese sterilization bonds. Japan has a debt to GDP ratio of over 200%, probably a record for advanced peacetime economies.
In this kind of situation, it is imperative to switch to other kinds of metrics that really characterize the true seriousness of the situation. Taxes cannot be increased or raised overnight because of political realities. Thanks to right-wing politicians and decades of intellectual brainwashing by right-wing economists, raising taxes to meet public finance needs is an uphill task. A debt-to-revenue ratio is a better metric for capturing the true urgency of the debt problem.
The public is often not aware of the dangers of exploding debt. Right-wing politicians talk glibly about balancing the budget by cutting spending, forgetting ground socio-economic realities. Public welfare systems provide much-needed and often indispensable assistance to those in distress. Also, doing away with too much of the welfare spending can easily have a negative impact on economic recovery during these difficult times. Even during good economic times, drastic welfare cuts can induce economic panic and recessions.
The United States gave a large tax cut to the wealthy and to corporations as it entered into major war spending around the world. Wars are supposed to be periods that require economic sacrifice. And common sense dicates that the rich, who have most to gain from security, should sacrifice more during wars. Just the opposite happened. And the community of economists were unable to highlight this incongruity to any significant extent. Right-wing economists of different colors and stripes are naturally enthusiastic about tax cuts. Left wing economists lacked clout in the right-wing Bush administration. War co-existed with a domestic picnic in the form of low tax rates for the wealthy and a booming housing market. I wonder what Mr. Tom Brokaw has to say about this generation - the most selfish generation ?
The battlelines have been drawn. Today's rich refuse to shoulder the burden of war expenditures and the burden of a much-needed welfare system. The stage is being set for significant economic distress for future generations. There may be a sovereign debt default by Japan and the US down the road, thereby constraining the ability of these governments to raise the debt necessary to meet their deficits. Given that the public is not well-versed in the nitty gritty details of public finance, politicians will not try to increase taxes due to their unpoularity. They will try to take the easier way out and try to do drastic cuts in public spending.
The United States had high tax rates in the 1990s with no deleterious effect on economic growth or corporate enthusiasm. A surplus was turned into recurring deficits due to decade-long tax cuts in the wake of a mild recession in the early 2000s. Throughout this decade, figures like Alan Greenspan called for reducing the deficit, always revealing their preference for spending cuts rather than reversing elitist tax-cuts. The damage has been done. It is very difficult to arouse the public will or the political will to raise taxes and to set the fiscal house in order during times of distress.
Future generations in these countries may well have to bear the major brunt of this mismanagement. Will social disturbance become the norm rather than the exception in these circumstances ? One is reminded of a poem by Langston Hughes, written in a different context and a different time, but which may hold lessons for this situation.
What happens to a dream deferred?
Does it dry up
like a raisin in the sun?
Or fester like a sore--
And then run?
Does it stink like rotten meat?
Or crust and sugar over--
like a syrupy sweet?
Maybe it just sags
like a heavy load.
Or does it explode?
Will a future society, groaning under an unmanageable public finance, and faced with the prospect of having to deal with new problems like green investment, explode in reaction to the fundamental and inherent inequities in the system ?
If a sovereign debt default does happen, will Japan, or the United States for that matter, have to go for shock-therapy-like steps involving drastic welfare spending reductions ? Will the tens of millions of Americans who depend on these payments and who have made significant contributions to the economy take such measures lying down ? At what level of economic pain will the public begin to lose faith in the rhetoric about efficiency ? What will the reaction be towards a political class that has mismanaged the public finances to such an extent ? Will the public take kindly to the rich of today, many of whom have lobbied Washington for tax cuts, and who have not showed a spirit of sacrifice when the country needed it ? Why will the class that supplies the majority of the war dead live in a spirit of compromise with the rich elites who do not sacrifice now for the country, and do not intend to sacrifice in the future for the country, if the welfare system becomes badly damaged due to deficits ? Rich innovators and rich entrepreneurs depend on a complex economic web that supports them and provides the conditions under which they are able to create wealth. As public finances become stressed, the poorer people will begin to question the value and utility of such innovations. Society itself may have to re-examine its priorities. National groups like Japan and the United States may have to re-examine what exactly it means to be a nation. At what level of economic parochialism does national cohesion becomes a meaningless thing ? What is the breaking point beyond which the public loses patience with the lack of a spirit of sacrifice on the part of the rich ?
by Choudhury Jayant Praharaj, Dec 27, 2010
In this kind of situation, it is imperative to switch to other kinds of metrics that really characterize the true seriousness of the situation. Taxes cannot be increased or raised overnight because of political realities. Thanks to right-wing politicians and decades of intellectual brainwashing by right-wing economists, raising taxes to meet public finance needs is an uphill task. A debt-to-revenue ratio is a better metric for capturing the true urgency of the debt problem.
The public is often not aware of the dangers of exploding debt. Right-wing politicians talk glibly about balancing the budget by cutting spending, forgetting ground socio-economic realities. Public welfare systems provide much-needed and often indispensable assistance to those in distress. Also, doing away with too much of the welfare spending can easily have a negative impact on economic recovery during these difficult times. Even during good economic times, drastic welfare cuts can induce economic panic and recessions.
The United States gave a large tax cut to the wealthy and to corporations as it entered into major war spending around the world. Wars are supposed to be periods that require economic sacrifice. And common sense dicates that the rich, who have most to gain from security, should sacrifice more during wars. Just the opposite happened. And the community of economists were unable to highlight this incongruity to any significant extent. Right-wing economists of different colors and stripes are naturally enthusiastic about tax cuts. Left wing economists lacked clout in the right-wing Bush administration. War co-existed with a domestic picnic in the form of low tax rates for the wealthy and a booming housing market. I wonder what Mr. Tom Brokaw has to say about this generation - the most selfish generation ?
The battlelines have been drawn. Today's rich refuse to shoulder the burden of war expenditures and the burden of a much-needed welfare system. The stage is being set for significant economic distress for future generations. There may be a sovereign debt default by Japan and the US down the road, thereby constraining the ability of these governments to raise the debt necessary to meet their deficits. Given that the public is not well-versed in the nitty gritty details of public finance, politicians will not try to increase taxes due to their unpoularity. They will try to take the easier way out and try to do drastic cuts in public spending.
The United States had high tax rates in the 1990s with no deleterious effect on economic growth or corporate enthusiasm. A surplus was turned into recurring deficits due to decade-long tax cuts in the wake of a mild recession in the early 2000s. Throughout this decade, figures like Alan Greenspan called for reducing the deficit, always revealing their preference for spending cuts rather than reversing elitist tax-cuts. The damage has been done. It is very difficult to arouse the public will or the political will to raise taxes and to set the fiscal house in order during times of distress.
Future generations in these countries may well have to bear the major brunt of this mismanagement. Will social disturbance become the norm rather than the exception in these circumstances ? One is reminded of a poem by Langston Hughes, written in a different context and a different time, but which may hold lessons for this situation.
What happens to a dream deferred?
Does it dry up
like a raisin in the sun?
Or fester like a sore--
And then run?
Does it stink like rotten meat?
Or crust and sugar over--
like a syrupy sweet?
Maybe it just sags
like a heavy load.
Or does it explode?
Will a future society, groaning under an unmanageable public finance, and faced with the prospect of having to deal with new problems like green investment, explode in reaction to the fundamental and inherent inequities in the system ?
If a sovereign debt default does happen, will Japan, or the United States for that matter, have to go for shock-therapy-like steps involving drastic welfare spending reductions ? Will the tens of millions of Americans who depend on these payments and who have made significant contributions to the economy take such measures lying down ? At what level of economic pain will the public begin to lose faith in the rhetoric about efficiency ? What will the reaction be towards a political class that has mismanaged the public finances to such an extent ? Will the public take kindly to the rich of today, many of whom have lobbied Washington for tax cuts, and who have not showed a spirit of sacrifice when the country needed it ? Why will the class that supplies the majority of the war dead live in a spirit of compromise with the rich elites who do not sacrifice now for the country, and do not intend to sacrifice in the future for the country, if the welfare system becomes badly damaged due to deficits ? Rich innovators and rich entrepreneurs depend on a complex economic web that supports them and provides the conditions under which they are able to create wealth. As public finances become stressed, the poorer people will begin to question the value and utility of such innovations. Society itself may have to re-examine its priorities. National groups like Japan and the United States may have to re-examine what exactly it means to be a nation. At what level of economic parochialism does national cohesion becomes a meaningless thing ? What is the breaking point beyond which the public loses patience with the lack of a spirit of sacrifice on the part of the rich ?
by Choudhury Jayant Praharaj, Dec 27, 2010