Ever since the late 2010s, the US fiscal situation has been on an unsustainable path. Of course, the problems began even earlier. But since the late 2010s, the budget deficit has become so large that the ratio of debt to GDP keep rising even during boom periods.
The situation is about to get worse. Here’s Bloomberg:
The US economy is set for an unexpected fiscal boost if lawmakers back a potential deal for $70 billion worth of tax breaks for businesses and families. . . .
“This is going to be a decent amount of fiscal cost with very little of it going to encourage new investment in a time when there are still inflation pressures,” Goldwein said.
Still, the plan could be a boon for President Joe Biden, whose poll numbers have slumped amid voter anxiety over the economy. Asked how the White House is weighing the potential inflationary impact of any proposal, Biden’s top economic adviser instead emphasized benefits of the bill.
Inflation is not the issue here—the Fed offsets the impact of fiscal stimulus. The real problem is the debt time bomb. Our political system no longer has “grown-ups in the room”, and thus our fiscal policy increasingly resembles that of a banana republic:
At the very least, the tax negotiations underscore that lawmakers remain a long way from entering an era of austerity even amid warnings from ratings firms and investors that the US fiscal trajectory is unsustainable.
After WWII, our public debt to GDP ratio fell sharply. That occurred due to a combination of small budget deficits and fast rising nominal GDP. Over the past three years, NGDP has again risen rapidly, but this time we no longer have the small budget deficits. Even worse, NGDP growth is set to slow sharply as part of the Fed’s anti-inflation program. If this happens, the debt ratio will begin rising again:
Even permanently high inflation would only be a temporary expedient, as it would eventually feed into higher nominal interest rates due to the Fisher effect. (In addition, it’s recently become clear that inflation is extremely unpopular with the general public.)
The only long run solution is some combination of higher taxes and lower spending. The longer we wait, the more painful the adjustment. I don’t see any major candidate addressing these issues, and thus it’s reasonable to assume that things will get much worse before the problems are addressed.
