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The US has reached a crisis stage regarding mounting sovereign debt, but a change of mindset and adoption of practical solutions can restore the nation to fiscal health. Unless actions are taken now to change the trajectories, deficits and debt are anticipated to enlarge over the coming decades with an aging population boosting spending, increasing debt service, and insufficient revenues. While there is no silver bullet, there are myriad policy actions that can cut deficits, lower debt to a sustainable level, reduce financial stability risks, and support US economic growth over the long run. Moreover, focusing upon lowering debt over a 20- or 30-year horizon instead of the typical 10-year CBO forecasting period can help rein in federal debt without significant damage to the economy. [ABSTRACT FROM AUTHOR]

Federal debt is on an unsustainable path. Low interest rates mean that we do not need to reduce budget deficits immediately and that we should do more public investment. However, we will need to make deficit-reducing changes eventually, and we should set those changes in motion now and use the extra time provided by low interest rates to phase in the changes gradually. The largest long-term changes will come through tax increases rather than spending cuts: the appetite for significant reductions in the big benefit programs is very limited among voters and their representatives on both sides of the aisle. Moreover, we should reduce deficits in ways that do not "share the sacrifice" as much as "steer the sacrifice" toward people who have been doing better. I worry that, in the next economic downturn, we will not undertake the fiscal expansion we should. We will have fiscal space in an economic sense, but I fear that too many people will pick that moment to be especially concerned about deficits (as occurred in 2011 and 2012). We have a uniquely inefficient healthcare system in this country. We probably should and probably will make more policy changes that amount to price-setting, rather than relying on market forces to hold down prices. [ABSTRACT FROM AUTHOR]

Abstract Comments on the role current federal deficits and recent policy have on state and local government budgets. Specifically, current policies and deficit levels may leave less room or political [...]

High tax rates that distort incentives and create large deadweight losses have been reduced, but there is still much more to be done to improve the tax system. It is useful to distinguish between tax rules that represent tax expenditures relative to a pure income tax from rules that represent tax expenditures relative to a consumption tax. I think it is important to focus on tax expenditures relative to a consumption tax base. It is possible that if there were no estate tax, the present value of the taxes paid by future heirs would exceed the revenue lost by abolishing the estate tax. On the corporate side, a shift to a territorial system of taxation would have very substantial favorable effects, while pass-through entities have a very weak case for a significantly lower tax rate. The net effect of such tax changes would be an increase in the budget deficit, though that increase is likely to be only temporary due to legislative rules. I am optimistic that there will be tax reforms enacted in the next twelve months holding great promise for improving our tax system and our economy. [ABSTRACT FROM AUTHOR]

Although weakness in the U.S. economy is an important factor in current federal budget deficits, even robust growth will leave unsustainable deficits unless there are major changes in federal policies. Moreover, deficits cannot be eliminated by reversion to past tax and spending policies. This paper explores the causes and magnitudes of the projected deficits and the choices that must be faced for the federal budget to regain a sustainable path. [ABSTRACT FROM AUTHOR]

Discusses the factors that contributed to state budget deficits in the U.S., as of July 2003. Role of the growth of government revenues and expenditures in the 1990s in the fiscal crisis; Reasons behind the reversal of state tax revenues in fiscal year 2002; Concerns over trends in unemployment and consumption.

Although recent performance and the short-term outlook for the U.S. federal budget deficit have been favorable, the good news is not expected to continue. Low interest rates and slowly growing health costs have helped ease the burden of debt, but they are not expected to continue for very long. A likely combination of growing spending on Social Security, Medicare, and Medicaid and higher interest rates would increase the drag on the American economy. This paper analyzes which expenditures do and do not cause a significant increase in the federal debt and describes how a remedy implies difficult choices that require leaders of both political parties 'to join hands and jump off the cliff together.' [ABSTRACT FROM AUTHOR]

These remarks summarize the economic forecast and budget outlook that the Congressional Budget Office (CBO) published in February 2014. The discussion has not been updated to reflect subsequent economic and budget data or subsequent projections by CBO. Under an assumption that current laws governing federal taxes and spending remain in place, CBO projects that real GDP will expand by roughly 3 percent between the fourth quarter of 2013 and the fourth quarter of 2014-the largest rise in nearly a decade. Similar annual growth rates are projected through 2017. Nevertheless, CBO estimates that the economy will continue to have considerable slack for the next few years. To a large degree, the slow recovery of the labor market since the official end of the recession in 2009 reflects slow growth in the demand for goods and services. To a smaller degree, that slow recovery is the result of structural factors that stem from the recession and the subsequent weak growth of output but that are not directly related to the economy's current cyclical weakness. The unemployment rate is expected to remain above 6.0 percent until late 2016. Moreover, labor force participation is projected to move only slowly back toward what it would be without the cyclical weakness in the economy. Beyond 2017, CBO expects that economic growth will be well below the average seen over the past several decades, primarily because of slower growth in the labor force arising from the aging of the population. Inflation, as measured by the change in the price index for personal consumption expenditures, is expected to remain at or below 2.0 percent throughout the next decade. Interest rates on Treasury securities are projected to increase in the next few years as the economy strengthens. The federal budget deficit has fallen sharply during the past few years, and it is on a path to decline further this year and next year. However, if current laws remain unchanged, the deficit will increase again after a few years because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly. Federal debt held by the public is expected to equal 74 percent of GDP at the end of this year and close to 80 percent a decade from now. [ABSTRACT FROM AUTHOR]

There are a number of misconceptions about the ongoing Eurozone crisis. One is that it is a debt crisis: in fact many countries that are considered to be reasonably sound have bigger long-term fiscal deficit problems than even the weakest Eurozone countries. The crisis partly reflects the pain of frontloaded fiscal repair. But even more so, the crisis has turned into a step-by-step attempt to forge a stronger and more coherent Europe. The reluctance of the European Central Bank to defuse the tensions which this process creates makes the region vulnerable to bouts of market turmoil. This paper outlines the course of the crisis, the policy responses to date, and the actions that are necessary to resolve it. [ABSTRACT FROM AUTHOR]

The U.S. economy is transitioning from a rescue phase to a recovery phase. It is easy to forget the depth of the crisis that required the rescue and easy to be impatient about the recovery. So far, the recovery has the hallmarks of a traditional recovery led by exports, fixed investment, and innovation. Issues of the federal deficit and debt loom over long-term prospects, however. Nonetheless, it should be kept in mind that the deficits are largely a product of the deep and prolonged economic slump and would diminish as a share of GDP as the economy grows stronger. This does not, however, mitigate the need to take serious action on reducing the structural deficit in a way that has bipartisan support and is smart in preserving the conditions for economic growth and fairness. Other concerns, such as oil prices, financial conditions in Europe, and the housing market must continue to be monitored and addressed. [ABSTRACT FROM AUTHOR]

The current economic crisis seems to be waning, largely due to effective federal government and Federal Reserve responses. Economists deserve credit for helping to avoid the abyss, but we failed to predict the crisis and warn policymakers so that the crisis could have been mitigated or avoided. We must not miss predicting the next crisis, however, as it is staring us in the face. We can see clearly that federal debt will severely damage the U.S. economy within several decades under current policy. Moreover, simulations that take into account the effect of debt on interest rates indicate that the depressing effect on the U.S. economy will be even worse than official projections suggest. [ABSTRACT FROM AUTHOR]

Sustained large U.S. current account deficits have led some economists and policymakers to worry that future current account adjustment could occur through a sudden and disruptive depreciation of the dollar and a sharp drop in U.S. consumption. Two factors that, to date, have cast doubt on such concerns are the stability of U.S. net external liabilities and the minimal net income payments made by the United States on these liabilities. We show that the stability of the external position reflects sizable capital gains stemming from strong foreign equity markets and a weaker dollar--conditions that could be reversed in the future. We also show that while minimal U.S. net income payments reflect a much higher measured rate of return on U.S. foreign direct investment (FDI) assets than on U.S. FDI liabilities, ongoing borrowing is likely to overwhelm this favorable rate of return, pushing the U.S. net income balance more deeply into deficit. In addition, we review the argument that the United States holds large amounts of intangible assets not captured in the data--assets that would bring the true U.S. net investment position close to balance. We argue that intangible capital, while a relevant dimension of economic analysis, is unlikely to be substantial enough to alter the U.S. net liability position [ABSTRACT FROM AUTHOR]

Given the rather large swings that the dollar has undergone in recent years, a number of observers are arguing that policy steps should be undertaken to stabilize the dollar around present levels. We make the case that exchange-rate management should not play a role in the U.S. macro-policy tool kit and, indeed, argue that the United States needs to convince policymakers overseas to allow their currencies to contribute to the U.S. trade-adjustment process. We show that the dollar needs to fall further, and likely quite sharply, in order to promote an orderly return of the U.S. current-account deficit to a sustainable level. [ABSTRACT FROM AUTHOR]

The administration and the Congress have agreed to enact legislation that would eliminate the federal budget deficit by year 2002. Underlying that agreement is the broadly shared view among economists [...]

In spite of the federal deficit-reduction package enacted October 1990, the deficit remains huge and national saving is still very low. In reconsidering the issue of U.S. saving, this article [...]

*George N. Hatsopoulos is Chairman of the Board and President, Thermo Electron, Waltham, MA. The author gratefully acknowledges the invaluable assistance of Dr. James M. Poterba, Professor of Economics at [...]

From 1982 to 1988, debt in the U. S. economy exploded. The ratio of debt to GNP, which had been noted for its stability for decades, climbed to a spectacular [...]