Tuesday, November 8, 2011

How Are the Debt Problems In Europe and The US Different?

The question raised in this article is whether the US or Europe screwed up their fiscal situation the most. The answer is that what Europe has attempted to create, with its union of sovereign states, was a noble but more difficult effort. Its not surprising that it ran into problems. The US fiscal problem, however, was self inflicted. We ran budget surpluses in the late 1990's. A political decision was made to cut taxes, increase spending on the military, and to add an expensive drug benefit to Medicare. This produced budget deficits that were manageable as long as the economy grew. When the housing bubble burst and the financial crisis produced recession, the deficits mushroomed out of control as tax revenue fell and government transfer payments automatically increased. The US is fortunate that it can still fund its debt at low interest rates. On the other hand, it has a dysfunctional political system that prevents it from solving its problems.

No comments:

Post a Comment