Global Economic Prospects 2014

Five years after the financial crisis, the world economy is showing signs of bouncing back. Read more ...

Development Prospects

Providing information, analysis, and advice on global trends in the world economy.  Find out more ...

Global Economic Monitor

Now free. Daily and monthly updates on global economic developments and relevant topical issues. Find out more ...

Syndicate content

American Perso-national Financial Statements

Israel Osorio Rodarte's picture

Think about your family. Think about your work, your earnings, debts, credit cards, your children's education, your retirement and the unforgettable taxes. Now, imagine just for just a few moments that you have just received a sealed envelope from your Congressman working at Capitol Hill. Inside this envelope there is a letter: "CONGRATULATIONS! This is your New Citizen Account Bill (PDF) with the Federal Government of the United States." Immediately the letter will tell you very good news. According to the policy of retuning back the excess of taxes, you will receive this year a credit of $7,700 per each member of your family. This amount corresponds to all federal taxes that were collected this year from all firms and individuals in the country.

Very excited, you continue reading and unfortunately you feel disappointed when your Congressman informs you that the $30,800 that your four-member family would have received has being already spent. It happened that almost $20,000 went to the Medicaid, Medicare and Social Security Programs; $12,500 to other programs of the Federal Government like the National Park System or Education; $9,500 to National Defense and Homeland Security, and nearly $2,450 to interest payments. After some calculations, you feel confused because you haven’t fully understood two things: The first is why expenditure exceeds your $30,800 credit. The second is where all those interest payments are coming from.

At the bottom of your New Citizen Account Bill, your Congressman informs you that the Congress and the President, using your explicit confidence in them, had contracted in your name a new small debt for your family of $18,300 in order to close the gap between revenues and expenses. He also states that those $2,450 that you are paying for interest services were charged to you because your family already owes a federal debt of $113,928. Mandated by law, I have to inform you that during the following years, more and more debt is going to be contracted in your name because of the approved fiscal changes of 2001-2003 and the dramatic situation we are facing in 2010, the letter continues. The bad news to come is that interest payments are poised to skyrocket. The good news – it says, is that foreign investors still believe in you as a secure borrower and a productive worker. So, it won’t be difficult to find someone that would be willing to lend you more money in the future. We believe in your capacity to increase your labor productivity and because we know that you have extraordinary investment plans for coming years, we trust that these announcements will encourage you to work harder---and the letter concludes!

According to recent estimates from the Congressional Budget Office, the US will cumulate a fiscal deficit of 6 trillion dollars from 2011 to 2020 under the current fiscal scenario. Some IMF staff estimates (PDF) suggest that this 10-year deficit will grow up to $9.9 trillion. In other words, your Congressman either will tell you that during the following ten years, your four-member family will contract new debt for $77,600 under the CBO scenario or $128,700 under the IMF staffs'... what can we expect?

To be honest, budget projections are very uncertain and they have as frequently been too optimistic as too pessimistic. Strong assumptions vary in each projection, and trends and politics do matter. Nevertheless, there is no mystery behind the federal budget like there is no mystery in how you face your family budget constraints. It’s as simply as revenues minus expenses, and choices between consumption today or saving and investments for tomorrow.

So, your family now faces a federal debt of more than $100,000 and (setting things in the middle of our two projections) you are going to double your debt during the following ten years. More over, all American families will do the same. To pay this federal debt plus your personal debts, maybe you’ll need to find an extra job; probably you’ll need to cut some already planned expenses; or more irresponsible, you can let your children to pay for it when they grow up. Specialists at the Brookings Institution qualify this situation as unsustainable and are calling to restore fiscal responsibility by having a new kind of public conversation on which the American people can actually express: "Look, we don't want to go into more debt."

To solve the problem, again, you’ll listen far too many confusing proposals. To evaluate them, first, don't over react. Try to keep things simple, be optimistic, and never believe in magic wands or in painless solutions. Think again about your family. What are you willing to sacrifice?

A postscript: This time isn’t different. The global financial crisis did exacerbate debt burdens in high-income countries, but it is not the structural explanation behind such debt accumulation. The excessive levels of sovereign debt in troubled nations are the results of simple repetitive behaviors: continuously borrowing more than what is raised, and making promises, especially for retiring people, that cannot be fulfilled. The corollary hasn’t changed: nations, as families, cannot prosper by living beyond their means. In the years to come, the U.S. will have to raise taxes and cut expenses in order to restore fiscal sanity. Because it is a more developed and stronger economy, its adjustment will be much less painful as Greece’s, for example; nevertheless, it will have strong negative implications for the global economic prospects, especially for developing countries highly dependent on the US economic recovery. In the decade to come, these countries have to be prepared for a harsh economic environment caused by tightening financial conditions and weak demand for their exports.

Comments

Submitted by Stephan on
What's the purpose of this blog entry? To frighten the average US citizen Joe and Jane or to showcase that the World Bank also employs defunct economists? "Nations, as families, cannot prosper by living beyond their means." The premise of the author seems to be: the US federal budget is comparable to a private sector household budget and thus is subject to the same constraints. This is complete nonsense. According to my latest findings: The US government has the exclusive legal right to issue the US$, a fiat currency which it also demands as payment of taxes – in this sense it has a monopoly over the provision of its own, fiat currency. I don't know any family with that sort of financial capability. By definition the US can't go broke. Government cheques don’t bounce! Next the author comes up with the now so popular poster-child for deficit terrorists: Greece. Unlike the US the GR government is not the issuer of its own fiat currency anymore and thus is subject to budget constraints. This is like comparing apples with grapes and only demonstrates that the author has no knowledge how the monetary system of the United States operates. Finally the author seems to be totally ignorant of how the System of National Accounts is computed.

Submitted by Yueqing Jia on
"The US government has the exclusive legal right to issue the US$, a fiat currency which it also demands as payment of taxes – in this sense it has a monopoly over the provision of its own, fiat currency. "----Then the debts are inflated or depreciated away. Everybody is happy and nobody hurts in this game?

Submitted by Camila on
Yes, it is true that the US government has the exclusive right to issue US$, but what about inflation? The idea of financing government expenditure with money emission seems a little off... The comment shows ignorance about the effects of excessive government expenditure over inflation, and interest rates... Think about government crowding out!

Submitted by Camila on
I think this blog sets a very interesting scenario for the common United States' citizen. Clear and concise idea: nor nations or families can live beyond their means. It is time for the American government and its people (especially) to realize this!

Add new comment