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American Exceptionalism in Debt Concerns

Jamus Lim's picture

Even as Greece continues to struggle with market uncertainty over its debt, some intelligentsia are making pronouncements about how the United States is next in line. Claims such as these are hyperbole. The U.S., after all, remains able to secure debt in its local currency. The rating on Treasuries remains many notches ahead of Greek paper (indeed, ratings on state issuances are all rated higher Greek sovereigns). And the 5-year CDS spread on Treasuries is one order of magnitude lower then Greece's: as of today, the spreads are about 45 compared to 355 bps.

It is, nonetheless, interesting to ask why such concern (obsession?) over U.S. national debt exists. One possibility is a genuine concern that large public sector deficits are not sustainable. Those in this camp point out that the both the fiscal and debt/GDP ratios are larger than the U.S. has ever bourne in the postwar period---and indeed for almost all of American economic history (see figure). However, as others have pointed out, the output share of U.S. government balances and debt are not especially unusual for developed economies. Another argument is that contingent liabilities mean that the long term budget outlook is much worse than the headline numbers show. But the U.S. is again not alone among developed economies in having large off-balance sheet liabilities. A third (and less charitable) explanation is that it is largely a matter of partisan politics. This would well be true, but polls consistently show that the concern about the national debt yield majorities across party lines.

Source: Congressional Budget Office

What gives? The way I see it, there are two possibilities why there may be cause now for heightened concern. The first is economic. Although the government balance for the United States is not all that different from that of other advanced nations, its projected deficit levels are extremely large, and is expected to be worse than most advanced economies up till 2014 (where the projections end) (see figure). Furthermore, the long-term budget outlook if the U.S. were to stay on its current course has debt ballooning to more than 300 percent by 2083 (see figure). In some ways, this is to be expected, given the large stimulus packages enacted in order to address the crisis-induced recession, for which America was the epicenter. While there are arguments to be made for temporary stimulus in order to avoid a prolonged downturn, given the continued economic pain felt by most workers, Americans may justifiably wonder if the record deficits and mounting debt are worth the gamble.

Source: IMF WEO database

Source: Congressional Budget Office

The second point is a little more socio-cultural. Americans have often been noted for their exceptionalism, perhaps in no small part due to its Puritan roots. Indeed, the U.S. remains an outlier among high-income nations in terms of its level of religiosity (see figure). This particular ethnic may have some mileage in explaining why Americans are as worries as they are about spiraling debt. This is likely to be exacerbated by their current disapproval of Congress.

Source: Author's calculations, from Barro & McCleary

From the perspective of developing countries, the continued growth of U.S. borrowing from the rest of the world---were it to continue on the current trejectory---is also worrisome, since this may mean a crowding out of sovereign and private sector borrowing by emerging markets. While takeup of issuances in the developing world remain healthy, the continued growth of U.S. debt is likely to mean higher interest rates of Treasuries in the medium run, as investor demand higher yields. This would raise the cost of capital for the rest of the world, and in some cases maybe even shut out affordable access altogether.



Submitted by Anonymous on
I think our exceptionalism is part of what makes us America. We know that we will conquer the economic hard times regardless of how bad it will get. I love that. nice article. ParisGirl111

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