US Government Debt Different - Finance Department - University of ...

Jim Millsteinfull list of options includes fiscal austerity (some combination of increasedtax revenues and reduced spending phased in over the mediumterm), asset sales, stimulus (which produces higher tax revenuesand reduced social welfare spending through enhanced economicgrowth), default, monetizing or inflating away debt, or financial repression.The two best options to reduce deficits in the medium termand to promote growth in the long term are fiscal austerity and assetsales.159Before exploring how much of the burden asset sales can handle, Iwill briefly explain why four of the options are not viable.Some have argued that large-scale fiscal stimulus is the way out ofthe debt trap. 8 The logic is that tax revenue from higher growth willmore than offset the lifetime cost of additional near-term borrowingto finance the stimulus. Looking only at the current low interestrate environment, this argument may have some appeal. However,recent experience suggests that Keynesian multipliers on spendingprograms may be significantly less than advocates of this approachwould have us believe. If, as Cogan, Cwik, Taylor, and Wieland convincinglyargue, the multiplier is less than one, then stimulus offersa bad trade. 9 Policymakers would simply pull forward economic resourcesat a premium. Moreover, they would add to a debt burdenalready approaching levels historically correlated with lower growth 10and at which the borrowing rate dynamic could change. It shouldtherefore be unsurprising that countries rarely grow their way out ofdebt problems. 118 Summers, L. and Delong, B., Fiscal Policy in a Depressed Economy, BrookingsPaper on Economic Activity, Mar. 2012; Krugman, P., Fiscal Policy Works, The NewYork Times, The Conscience of a Liberal Blog, Dec. 24, 2011.9 Cogan, J. et al., New Keynsian Versus Old Keynsian Government Spending Multipliers,Journal of Economic Dynamics and Control, Vol. 34, Issue 3, pp. 281-295,Mar. 2010.10 Reinhart, C. and Rogoff, K., Growth in a Time of Debt, American EconomicReview: Papers & Proceedings 2010, 100:2, pp. 1-9 (demonstrating that mediangrowth rates for countries with public debt over roughly 90 percent of GDP areabout one percent lower than otherwise and average growth rates are several percentlower).11 Id.