A Cure for Fiscal Failure?

CAMBRIDGE – Should more countries create independent fiscal advisory councils to infuse greater objectivity into national budget debates? Jailed swindler Bernie Madoff recently summed up a lot of people’s feelings about fiscal policy, declaring that “the whole government is a Ponzi scheme.”

Perhaps this was just wishful thinking from a man who will die in prison after his own record-breaking $50 billion pyramid scheme collapsed in 2008. Personally, I suspect Madoff’s unenviable place in the record books will be secure for quite a while. Still, with many of the world’s largest governments facing a lethal combination of unsustainable conventional debt, unprecedented old-age pension obligations, and a downshift in growth, one has to wonder what the fiscal plan is.

In a new paper, “A Decade of Debt,” Carmen M. Reinhart and I show that general government debt in the United States, including federal, state, and local debt, has now surpassed the record 120% of GDP reached at the end of World War II.

Japan, of course, is in even worse shape, with government debt totaling more than 200% of GDP. Though this is partially offset by foreign-exchange reserves, Japan now faces massive disaster-relief costs – and this on top of its depressing demographic trends. Many other rich countries’ debt levels are also uncomfortably close to 150-year highs, despite relative peace in much of the world.