Government Will End Unsustainable Debt With Higher Taxes

As every economist knows, Stein’s Law says that trends which can’t continue don’t. Unfortunately, it doesn’t tell us anything about when or how they come to an end. Since our national debt is assumed by virtually all economists except my friend Jamie Galbraith to be unsustainable, and since it seems increasingly unlikely that Congress will act before it has a gun at its head, a few analysts are starting to think about when and how a debt crisis will ultimately emerge and how the government will respond.

In my Fiscal Times column this week I examine some recent research on this question.  It is almost a certainty that higher taxes will be the primary governmental response. The reason is that the key metric of debt sustainability, according to bond market analysts, is not the debt/GDP ratio, but interest on the debt as a share of revenues. Therefore, cutting spending–even a lot–won’t do any good in a crisis situation; only higher revenues will help calm markets.

One of the studies I cite in today’s column did something interesting. It looked at the debt/revenue ratio as a measure of debt sustainability, as shown in the table below. As one can see, our debt problem is by far the most serious among the countries examined, and even raising revenues to their postwar average of 18.2 percent won’t help much.

Debt Ratios, 2009
Country	Debt/GDP	Revenues/GDP	Debt/Revenue
U.S.	53	14.8	358.1
Greece	115.1	36.9	312.2
Ireland	64	34.1	248.4
Italy	115.8	46.6	187.5
Portugal	76.8	41.6	184.8
U.K.	68.1	40.2	169.2
Germany	73.2	44.3	165.3
France	77.6	48.0	161.7
Spain	53.2	34.7	153.2
Source: Morgan Stanley