The US Fiscal Situation Causes and Remedies

By Edward Lazear
The Economists' Voice
March2012 Vol. 9 Issue 2

In 2008, the U.S. debt held by the public was $5.8 trillion. By the end of 2012, just four years later, it will likely be about double that number. The debt averaged 38.5 percent of GDP over the thirty years ending in 2008, but rose by about 10 percentage points per year from 2009 to 2011. This essay will decompose the change in the debt into that which resulted directly from the recession and that which resulted from policy choices. In particular, I will distinguish the short-run debt problem from the long-run one. Because much of the increase in the debt is a reflection of a policy change, the debt growth can be reversed by altering policy again. There is some room for optimism. Coupled with the rebound in receipts that will occur as the economy recovers, the policy changes can move our fiscal situation back in a favorable direction. Specifically, I will argue that it is necessary to tie Government’s hands to limit spending growth and will offer a proposal that can eliminate the deficit in a reasonable period of time.