Economics: Is There a Fiscal Crisis in the United States?

Debt has surged, relative to G.D.P., six times in American history, during the War of Independence, the War of 1812, the Civil War, World War I, World War II and since 2000. In the first five instances, debt rose as the government scrambled to raise resources to pay for a war effort. After each of those wars, debt was steadily reduced relative to the size of the economy — over decades, not over months or even years.

The debt surge since 2000 is different — a point that James Kwak and I explain in detail in our book, published this week. To be sure, we have the two expensive wars, in Iraq and Afghanistan.

But much more of the increase in the deficit was because of tax cuts under George W. Bush, Medicare Part D (which expanded coverage for prescription medicines) and — most of all — the financial crisis that brought down the economy and sharply reduced tax revenue starting in September 2008.

Our modern debt surge is much more about declining federal government revenue than it is about runaway spending. If you believe strongly that our fiscal issues are primarily about runaway spending, please read our book.

The smart approach is to begin the long and not-so-nice work of controlling deficits while allowing the economy to grow.

For more, see Is There a Fiscal Crisis in the United States? by Simon Johnson, April 5, 2012 at Economix.