Wednesday, March 24, 2010

My Fiscal Debt Prediction

Here is Mankiw's:
My own guess is that the United States will raise taxes substantially, and taxes will reach levels as a percentage of GDP never seen in U.S. history (although common in Europe). The politics of that will be fascinating to watch. If the political process is stymied as our leaders debate the relative merits of tax hikes versus spending cuts, bond investors may get nervous, and we could get witness either the Krugman inflation scenario or the much less likely default scenario.
I actually see the default scenario as the most likely out, perhaps because my guess of what future tax rates will have to look like are higher. Not only do I expect them to be higher than in Europe, but more importantly I expect Americans to be far more disdainful of higher tax rates to pay off the previous generation's debt. I could see a lot of Americans accepting high taxes for European-level services, but that's not what they would be getting.

Note that I am certainly not making an economic argument, but a political forecast, which is well outside the domain of my expertise.


Unknown said...

That's OK. Political forecasts are no one's expertise. No harm in trying.

Personally I see inflation as more likely, though. Just because we have a long tradition of paying our debts in that manner and we've never in our entire history outright defaulted (though technically I think inflating the debt is considered a kind of partial default).

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