Resolving U.S. Indebtedness: Various Scenarios
By Arnold Kling
“Winterspeak” wonders if I would bet on the U.S. defaulting. Here are the alternatives that I can think of, and the odds I would give to them:
1. Muddle through. No major change in policy, and no major change in economic growth, but somehow the ratio of debt to GDP remains stable. I give this a 10 percent chance, although it implies that I am miscalculating the path that we are on. I really don’t see how it can happen.
2. Technology to the rescue. Some major technologies, probably either wet or dry nanotech, produce so much economic growth that the ratio of debt to GDP stays under control. I give this a 20 percent chance. Sometimes I think the chances are higher, maybe even 50 percent. It’s a difficult estimate to make–today, I’m in a mood to say 20 percent.
3. Policy changes. Congress increases taxes (but does not enact a wealth tax) and/or takes steps to rein in Medicare and Social Security spending. I should point out that I have been writing about the race between Medicare spending and economic growth since 2003. I give this a 25 percent chance.
4. Inflate away the debt with moderate inflation (between 5 and 10 percent per year). I think this would be politically costly, and it might not be enough to really inflate away the debt (it depends on how quickly bond investors adjust expectations and raise the inflation premium in nominal interest rates). I gives this a 15 percent chance.
5. Wealth tax. The government takes, say, 5 percent of everyone’s personal assets above $100,000. It does this on a one-time basis (or so it says). I give this a 25 percent chance.
6. Hyperinflation. This would certainly expunge the debt, but it would be political suicide. I interpret Winterspeak as taking this scenario seriously. I don’t.
7. Default. The U.S. simply refuses to pay some or all of its debt. I interpret Winterspeak as saying that this would never happen. I am inclined to agree, although I would just say that it is highly unlikely.
I think that the combined chances of (6) and (7) are no more than 5 percent, with (7) even less likely than (6).