Public Debt in the USA: How Much, How Bad and Who Pays?

In terms of the ratio of its public debt and public deficit to GDP the United States lies in the middle of the pack of industrial countries. The period since 1980 is the only peacetime period outside the Great Depression to see a sustained increase in the debt-GDP ratio. The budgetary retrenchment planned by the Clinton administration is likely to prove insufficient to achieve a sustainable path, although the remaining permanent primary (non-interest) gap is small: between 0.1% and 1.0% of GDP. The maximal amount of seigniorage revenue that can be extracted at a constant rate of inflation is not far from the recent historical value of less that 0.5% of GDP. Subtracting net public sector investment from the conventional budget deficit is likely to overstate the government revenue producing potential of public sector investment. Public debt matters when markets are incomplete and/or lump-sum taxes are restricted. Future interest payments associated with the public debt are not equivalent to currently expected future transfer payments. Even ignoring the distortionary character of most real-world taxes and transfers, and holding constant the government's exhaustive spending programme, the `generational accounts' do not therefore constitute sufficient statistic for estimating the effect on aggregate consumption of the government's tax-transfer programme. Solving the immediate budgetary problems would still leave the much more serious macroeconomic problems of an undersized US Federal government sector and an inadequate US national saving rate.