Part 3: The Nation's Profound Budgetary and Economic Challenges

October 18, 2011
Presentation (.pdf)

America's indicators of fiscal health compare poorly with peer nations (the G-7 minus Italy), in terms of budget deficit, gross debt, debt maturity, etc. Chairman Ben Bernanke says that there need to be significant policy changes, else the federal government's finances will inevitably spin out of control.


William Emmons: So what I'd like to do now is go through a presentation of what I hope are facts. I hope opinions don't seep in too much. I'm sure it's inevitable at some point. But I want to start with what I think is one of the most stark and as far as I can tell the most accurate statements of the situation we face. And that was by the Congressional Budget Office, which in one of its reports stated quite simply: "The United States is facing profound budgetary and economic challenges." And I think, as we've said, that's a virtually unanimous agreement on that score.

I think you have a handout on your tables that will allow you to take this home and look at it. I'm not going to go through the basic information. But just to kind of set the stage, these profound budgetary and economic challenges that we face of course are not unique to the United States. And so a natural question that arises is, well, how do we compare to other countries? So one way to compare is to look at the United States on a variety of indicators. And this is taken from the New York Fed's research looking at six different indicators and comparing the United States to what you would probably call our peer nations. This is, if you will, the G7 minus Italy. Italy has been demoted to another group. And this is roughly in the order, if you look across these different indicators and rank the indicators, the order in which the countries are listed is roughly how this would shake out, depending exactly how much importance you assign to each indicator. So that's Canada, France, Germany, Japan, U.K. and the United States coming in sixth.

And the individual indicators across the top, in terms of our budget deficit, is the biggest of these six countries. The gross debt—and I'll talk about these terms a little bit later—the broadest measure of the federal debt is the next to highest among this group. The net debt, which is debt held by the public, is near the middle. The amount of interest we pay on that debt is near the middle. We have the shortest maturity of debt, which is a risk factor, so if there is some problem in accessing financial markets, the shorter the debt maturity, the more often we have to go back to the markets. And in terms of this is a measure of saving in a sense of how much we're borrowing from abroad, it's also the most troubled in the United States.

So we don't do very well. We don't look very strong, relative to those natural peer nations. You could also think about countries that are facing debt issues much more immediately than any of those countries. So this is what's often called the peripheral European countries: Greece, Ireland, Italy, Portugal, Spain, Belgium is thrown in there also because they have very high debt levels. And even if you were to put the United States into this group, the rankings are across the top here. So out of these seven countries, we rank sixth in terms of—we're actually a tie for sixth—the highest budget deficit even among this group of countries. We do better on the debt measures. But we have, again, the relatively short maturity of our debt, so that exposes us to some risk if we were to have a deterioration and sentiment toward U.S. debt. And on the savings measure, we have a trade deficit that reflects imports of capital from overseas.

So lots of details, lots of numbers on these pages. Those aren't so important. It's just the point is that we are facing serious problems. Even in comparison to other countries, our problems look fairly daunting. Other countries have some problems also, of course.

Also, and this is sort of again to motivate the importance of this question, and I think also to think about the difficult policy choices, and that's what we're going to be talking about a little bit later. This is Federal Reserve Board Chairman Ben Bernanke who said a few months ago: "Without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage." And I think nobody can accuse Chairman Bernanke of being excitable. He’s a very calm, rational observer, I think, of the situation. And even as I noted at the outset, this is not directly the Federal Reserve's responsibility—fiscal policy—but the chairman felt that it was so important to speak out on these issues that he made a fairly bold statement saying we need significant policy changes to occur.

So tonight what I want to do is first give you some background on where we stand and where current trends seem to be pointing us. And then the second part will be a little bit more specific discussion about how we might go about tackling or reversing these trends that we seem to be facing. And then I want to then turn to you, get your questions and comments. My goal is to get those first two parts done by 8 o'clock, so that's what I would like to do to leave a full half hour for questions.