Larry Summers writes.

[we need] policies that restore a situation where reasonable growth and reasonable interest rates can coincide. To start, this means ending the disastrous trends toward ever less government spending and employment each year

The CBO wrote,

By 2038, CBO projects, federal spending would increase to 26 percent of GDP under the assumptions of the extended baseline*, compared with 22 percent in 2012 and an average of 20½ percent over the past 40 years.

Did you two visit the same country?

*The “extended baseline” is an unrealistic scenario, which includes spending cuts that are embedded in current law but unlikely to be retained by Congress. The more realistic “alternative fiscal scenario” projects even higher spending relative to GDP.

From the comments on this post:

the entire discussion is about accounting for “money” which while very important is not the same as real output.

Let us assume, as a first approximation, that real output is the same, regardless of the path of the government budget. In that case, we are talking only about distribution issues. Kotlikoff tends to worry about the intergenerational distribution. We may be on a path in which Baby Boomers consume a lot, and their children and grandchildren are taxed heavily to pay of this.

My own concern is that the distribution issues cause damage to our social and political fabric. We set ourselves up for ever-increasing strife. Please re-read Lenders and Spenders.

From Laurence Kotlikoff:

The US fiscal gap now stands at an estimated $205 trillion, or 10.3 percent of all future US GDP. Closing this gap is imperative, and requires a fiscal adjustment of an immediate and permanent 37 percent reduction in spending (apart from servicing official debt), an immediate and permanent 57 percent increase in all federal taxes, or some combination of the two. The necessary size of this adjustment increases the longer it is put off.

Meanwhile, all reasonable centrists can celebrate the Ryan-Murray budget compromise.

The bill will authorize $1.012 trillion worth of discretionary spending in 2014, more than the $967 billion scheduled under sequestration

Have a nice day.

Romain Hatchuel writes,

As applied to the euro zone, the IMF claims that a 10% levy on households’ positive net worth would bring public debt levels back to pre-financial crisis levels. Such a tax sounds crazy, but recall what happened in euro-zone country Cyprus this year: Holders of bank accounts larger than 100,000 euros had to incur losses of up to 100% on their savings above that threshold, in order to “bail-in” the bankrupt Mediterranean state. Japanese households, sitting on one of the world’s largest pools of savings, have particular reason to worry about their assets: At 240% of GDP, their country’s public debt ratio is more than twice that of Cyprus when it defaulted.

I consider this to be one of the most likely scenarios.

Cullen Roche writes,

total fossil fuel resources owned by the Federal government are valued at over $150 trillion alone.

Pointer from Mark Thoma.

My guess is that land is the largest real asset of the government. So there is a case for saying that even with all the unfunded liabilities that the government has accrued, the government is not broke.

I think that the best argument against those of us who say that the U.S. will have to inflate away its debt at some point is the argument that the government could sell assets if it wanted to.

First, some reality:

At the close of business on Jan. 20, 2009, the day Obama was inaugurated, the U.S. government debt held by the public was $6,307,311,000,000, according to the Daily Treasury Statement for that day.

At the close of business on Sept. 30, 2013—the last day of fiscal 2013—the Daily Treasury Statement said the U.S. government debt held by the public was $11,976,279,000,000.

I think that it is fair to attribute a lot of this debt increase to policies and economic conditions created under President Bush. Still, I find it ironic that President Obama would tell Wall Street that investors should be concerned about a potential default.

My views of the current situation:

1. Our politicians are like a family with a huge credit card debt. The Republicans are threatening not to make the minimum payment, and that is clearly a case of brinkmanship. However, the Democrats have no plan to keep the debt from growing out of control, and that in its own way is brinkmanship.

2. It is almost as if our political system and the news media are designed to conjure up short-term symbolic conflicts to distract attention from long-term problems.

3. A good rule of thumb in politics is that fiscal conservatives make noise, but spenders win in the end.

1. Meg Jacobs writes,

Austerity has shaped American politics and policy for almost four decades. Over that period, the pressure for deficit reduction and spending cuts has been ongoing and intense. Even when liberals have found a modicum of political space to push through new social initiatives, such as President Obama’s Affordable Care Act, the agenda has quickly returned to constraining and limiting the growth of government. Democrats have generally joined Republicans in embracing this cause. The debate has centered on how far to go with austerity, rather than whether austerity is even the right objective.

That is the point of a recent spate of books from the unrepentant Keynesian left, which offers a potent, if largely unheeded, critique of contemporary public policy. These books argue that we’re in the mess we are in today—an anemic recovery, chronic underinvestment in the public sphere, and the specter of EU collapse—because of the austerity policies that the United States and Europe have chosen.

2. Ian Talley writes,

The U.S., Japan and Europe risk drowning in debt, with public obligations in rich countries hitting levels close to the historical peak reached in World War II.

How did the most advanced countries in the world get it so wrong?

Overly optimistic budget projections, poor data on government liabilities and a flawed understanding about how shocks can hurt public finances, the International Monetary Fund says in a new policy paper published Tuesday.