Bond Bubble Watch
By Arnold Kling
Nobel Laureate Gary Becker comments on the possibility of a debt crisis.
Morgan Stanley’s report argues debt/GDP is not a good measure of default risk, and suggests instead the ratio of debt to government revenues. On this measure, the US looks terrible, with a ratio of 3.58. This ratio is much higher than that of the eight European nations because they tax a much larger fraction of GDP than the federal government of the US does. Yet it is not obvious to me that using tax revenue rather than GDP in the denominator is a better measure of solvency risk. Countries that already collect a sizeable fraction of GDP as tax revenue have less room to raise taxes than do countries like the US that tax a much smaller fraction.
I wonder how the state and local sector plays into this. If we add in state and local taxes, then the ratio of taxes to GDP in the U.S. is not so much lower than that in European countries (although it is still somewhat lower). In addition, state and local governments have also accumulated unfunded liabilities (although not nearly as much as the Federal government’s future obligations in Social Security and Medicare).
In any case, I think it would be brave to assume that raising the ratio of tax revenues to GDP is a feasible solution to our fiscal problems, even if it were politically palatable.