2| Pyg off Gvermet DetGlobal FinanCial DaTa
The current economic recession has led tounprecedented peacetime decits and increases ingovernment debt in developed countries. For only the second time in the history o the United States,government debt will soon exceed GDP. The long-runcosts and the impact o this growing debt remainshighly uncertain and is the chie topic o politicaldebate in the current US elections. While the WhiteHouse says these decits are necessary despite thecosts, others say the debts impose costs on uturegenerations. Tea Party supporters say governmentexpenditure must be cut.Unortunately, very little is known about the historicallevels o government debt or dierent countries o the world outside o the United States and how dierentcountries have dealt with large levels o governmentdebt in the past. Global Financial Data has collectedhistorical government debt and GDP data or themajor world economies going back to the 1800s. Thispaper is based upon the ndings o this research.
The Origin o Government Defcits
The government runs a decit because it is unable orunwilling to collect a sucient amount o taxes withinany given year to cover its expenditures. For mosto its history, the United States balanced its budgetexcept in war time. Ater the war, the governmentran surpluses to pay down the debt accumulatedduring the war or ran decits less than the growth innominal GDP. A long-term graph o US debt on page23 shows rises in the Debt/GDP ratio during the Waro 1812, Civil War, World War I, and World War II.The true cost to the economy o government isthe expenditures it makes, not the taxes it collects.Government can either collect taxes today or issuepromises (currency or bonds) to pay or its purchasesin the uture. When the government increases themoney supply, it can cause infation, and i it issues bonds, it can “crowd out” the private sector.Running decits implies less spending in the uturesince the government must pay interest or retire bonds. In some cases, short-run decits can be justied. Just as consumers or businesses may wishto smooth out the cost o consumption over time,so can government. I the government is buildinginrastructure which has long-term benets, it may borrow money today to be paid o in the uture.Similarly, the government may run a cyclical decitduring a recession which it can pay o when theeconomy recovers.Structural decits are another matter. A structuraldecit that is used to pay or services or transerincome, unlike capital investment, does not add tothe net wealth o society, and implies higher taxesor lower government services in the uture to osetthe accumulated structural decits. As Robert Barrohas shown, these types o structural decits can havemultipliers less than one because o their impact onincentives and the economic misallocations they create. Unortunately, a portion o the current decitthe US is running is structural in nature.A structural decit implies structural adjustmentsin the uture; however, it may be dicult to generatethe uture surpluses needed to pay o this debt ordemographic reasons. An aging population implies both a higher recipient to taxpayer ratio, and higherhealth care costs or the elderly. Calculations o the implied cost o the entitlement programs the