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How to Pay Down the Debt

Economic growth is the best bet.

May 17, 2010, Vol. 15, No. 33 • By JAMES PETHOKOUKIS
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A death panel for the national debt? Please. Even members of the National Commission on Fiscal Responsibility and Reform seriously doubt whether they can construct a “grand compromise” on taxes and spending. America isn’t Greece (yet). Not enough sense of impending doom. President Barack Obama’s bipartisan, all-star team of budget hawks might have to settle for merely educating Americans on the financial black hole slowly enveloping the U.S. economy.

How to Pay Down the Debt

Yet before newspaper editorial pages predictably bemoan a “broken Washington” where Democrats won’t reform entitlements and Republicans won’t embrace a value-added tax, they should consider this: The “slash and tax” approach has a poor record of success globally. Since 1980, some 30 debt-plagued nations have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a new study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.

Then again, broad tax increases on the middle class and snipping the safety net like a bonsai tree aren’t the only possible fixes out there—despite being the preferred ones of elite Washington. There are other options:

 CONFISCATE. Talking about Wall Street, Obama recently said, “I do think at a certain point you’ve made enough money.” Is it that far a leap to “I do think at a certain point you’ve accumulated enough wealth”? It actually seems like a natural outgrowth of moaning on the left about rising inequality. Various European nations already tax wealth in addition to income. So does the United States via property and estate taxes. But some liberals want to implement a pervasive, European-style system where the total net wealth of, say, the top one percent of taxpayers would annually be taxed a percentage point or two .  .  . or three. Paper gains on a stock portfolio, for instance, would be treated as realized gains every year. A wealth tax on America’s Buffetts and Bloombergs could theoretically raise $100 billion to $300 billion a year.

But why stop with the super-rich? Desperately indebted nations make desperate moves. In 2008, Argentina’s government seized control of its $30 billion private pension system. Think it couldn’t happen here? Well, Teresa Ghilarducci, a professor at the New School of Social Research, wants to turn the $3 trillion 401(k) system into a kind of enhanced Social Security plan, with mandatory contributions, run by Washington. Her ideas have been warmly received on Capitol Hill by Democrats—including Jim McDermott of the House Ways and Means Committee—and received favorable mention in a recent report from the White House’s middle-class task force run by Vice President Joe Biden. Ghilarducci’s plan targets a tempting pool of accumulated wealth for the government to tap in some future U.S. sovereign debt crisis. Unlikely? Perhaps—but no more so than sinking hundreds of billions of taxpayer dough into troubled banks.

 INFLATE. When emerging economies start to submerge, they often default. But when you own the printing presses for the global reserve currency, default really isn’t necessary. Boost inflation and repay the debt in cheaper dollars over a long period of time. It’s worked before, if only unintentionally. The fiscal cost of World War II more than doubled the U.S debt-to-GDP ratio to 121 percent in 1946. But by 1980, it was just 33 percent. Of that decline, UBS estimates, 60 percent came from inflation, thanks to a three-year surge in prices right after the war and the runaway inflation of the late 1960s and 1970s. 

Right now, the U.S debt-to-GDP ratio of 63 percent is expected to rise to 90 percent by 2020, according to the conservative forecasts of the Congressional Budget Office. Simply to keep that ratio steady at current levels, inflation would have to average 5 percent a year for the next decade. And as it turns out, that is just what the International Monetary Fund is suggesting high-debt nations around the world think about doing. The current Federal Reserve chairman, Ben Bernanke, probably has little interest in seeing the central bank squander its hard-earned credibility as an inflation fighter. But note that the likely incoming Fed vice-chair and possible Bernanke replacement, Janet Yellen, is considered an inflation dove and might be more receptive to the idea.

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