The Sickness unto Debt (with Pie Chart)
This pie chart from the IMF, via Ezra Klein, shows the various sources of new debt taken on by G-20 governments since the recession began. Stimulus spending and financial-sector bailouts account for a comparatively small portion. (Not sure though if U.S. figures would be in lockstep proportion with G-20 numbers here.) The bulk is just a consequence of the fall in tax revenues, which, of course, is a consequence of a drop in incomes. Klein writes:
A lot of people, understandably enough, assume that [the run-up in debt] is the product of government spending. The stimulus was expensive, and the bank rescues seemed expensive, and we just passed a health-care reform plan, and that must be why the deficit blew up.
The IMF, in a new report (pdf), explains that that’s not the case. “Of the almost 39 percentage points of GDP increase in the debt ratio, about two-thirds is explained by revenue weakness and the fall in GDP during 2008-09,” they write.
[...] This isn’t just an interesting explanatory point, though. It’s a reminder that the most important thing we can do to reduce the deficit in the long run is to do whatever it takes to get economic growth back up to speed. The more willing we are to accept permanently higher unemployment and permanently lower growth, the harder it’s going to be to get our debt under control.
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