our boom became doom

Simon Johnson:

The United States stands out as quite different.  No one is yet seriously proposing to address our underlying budget issues.

There Are No Fiscal Conservatives In The United States

There are certainly people who claim to be “fiscal conservatives” – some of the right and some on the left – but none can yet be taken seriously.  The implications are very bad for our fiscal future.

The background, of course, is that the US budget was in relatively good shape at the end of the Clinton years (culminating in a 2.5% of GDP surplus in 2000) – but turned sharply into deficit during the George W. Bush era.  The headline 2% deficit in 2006, for example, perhaps did not look too bad – but it was remarkably poor performance given how well the economy was doing.

The notion that tax cuts would lead to productivity increases, thus boosting growth and in turn fixing the budget, turned out to be completely illusory.

In fact, the tax cuts encouraged consumption, leading to overspending at the national level (and reflected in a current account deficit that reached 6% of GDP – this represents a big increase borrowing from foreigners by both the private sector and the government.)

But what really bust the US budget and pushed up our debt-to-GDP ratio was the way the financial system amplified the housing-based boom and bust through 2008; there were some “feel good” effects through the end of 2007, but then we faced the worst recession since World War II.  Net government debt held by the private sector will increase from about 42 percent of GDP to around 80 percent as a direct result of the economic crisis – and the measures taken to prevent it from turning into another Great Depression.