This morning I noticed that Greg Mankiw had posted a link on his blog to an issue summary from the Congressional Budget Office (CBO) that was published four days ago. It can be found here.
The report is entitled “Federal Debt and the Risk of a Fiscal Crisis.” If you are at all interested in the economic forecast for our country, you should read this document. It’s clearly written, easy to understand, and only 8 pages long.
My interpretation of this report is that we have yet to experience the worst side effects of the recession. Eventually, government spending has to be reformed. Under current policies, we would have to either reduce spending by 1% or increase revenue by 1% immediately to keep the federal debt under control. Under the “alternative fiscal scenario,” which includes hypotheticals such as the extension of the Bush tax cuts and the repeal of healthcare reform, it would be 5%, which is equivalent to 20% of the government’s non-interest spending.
The report also looks as three recent fiscal crises: Argentina, Ireland, and Greece. These provide interesting insights into the future path our country might take. The biggest question seems to be at what point do investors lose confidence in the US government’s ability to pay off its debts.
Although the report doesn’t come out and say it, it seems that the absolute worst thing that could happen in the next few decades is another recession. And while the recent financial reform was a good start, it’s pretty clear that no one thinks it will prevent another collapse of our economy. We would do well to understand how the US avoided any major recessions, relative to our current one and prior ones, for most of the 20th century.