Academic journal article The Journal of Government Financial Management

Debt Sustainability of the World's Largest Economies

Academic journal article The Journal of Government Financial Management

Debt Sustainability of the World's Largest Economies

Article excerpt

At $18 trillion in gross domestic product (GDP), the United States (U.S.) currently represents the largest economy in the world. Yet when evaluating economic growth rates, China eclipses the U.S. While the U.S. economy expanded at a modest average annual rate of two percent between 2011 and 2015, China's economy grew at an average rate of eight percent during this same period (see Figure 1)! At this pace, the world's second-largest economy is expected to surpass the U.S. in economic output by 2030 or sooner.2 With that said, multiple factors threaten sustainable economic progress in these two countries.

While China has enjoyed unprecedented continuous high-economic growth over the past 40 years through market-oriented reforms,3 this growth has been paradoxical. Rapid industrialization has come at the cost of labor strife and environmental consequence. Due to inadequate controls placed on industrial activity and consumer behaviors, less than one percent of the water systems in China's 500 largest cities meet national quality standards; air pollution has contributed to more than one million premature deaths annually and the country remains the world's largest source of carbon pollution.4 Meanwhile, the U.S. confronts many national obstacles including crumbling public infrastructure, political gridlock, widening wealth inequality and an aging workforce.5 Both countries will require leadership and future resources to overcome these challenges.

Chinese shipments represent 19 percent of all U.S. imports, the highest of any trade partner.6 Likewise, China's main export partner is the U.S.7 Given their close trade alliance, the Chinese and U.S. economies are highly interdependent. In September 2015, a stock market crash in China was considered a leading factor in a U.S. Federal Reserve Board of Governors' decision to delay an interest rate hike in September 2015.8 After a seven-percent decline in the Chinese stock exchange that suspended trading in early 2016, a sharp sell-off was triggered on Wall Street.9 Outside of the troubles in the equities market, a greater problem could be the heavy debt burdens the two countries have incurred to fuel economic growth.

As reflected in Figure 1, the U.S. relied extensively upon deficit spending to climb out of the 2008 recession. While national deficit spending is less apparent within China, the data can be misleading. Chinese banks, local governments, government-sponsored enterprises and other companies have relied upon shadow-banking arrangements to borrow money from individual investors to finance high-risk construction and real estate ventures.10 These borrowings are not reflected in the figure. The lack of transparency surrounding these financing arrangements has troubling parallels to the U.S. sub-prime mortgage crisis of 2007.

PUBLIC DEBT BURDEN

While the first $1 trillion in gross federal debt in the United States took more than 200 years to amass,12 the nation has added more than $17.4 trillion in the last 35 years alone (see Figure 2).13 Before the Great Depression, the nation would only run deficits during wartime or economic crisis, but aim to pay off debts during periods of economic prosperity.14 In the modern era, this precedent changed. Despite significant economic growth in the past five decades, there have only been four years, 1998-2001, in which the federal government has generated a surplus.15

Ever since the economist John Maynard Keynes advocated stimulating aggregate demand as a means to achieve potential economic output, deficit spending has run on unabated. This year alone the U.S. grappled with a $430 billion annual budget deficit. Most troubling, if one were to include the net present value of total future payments promised to citizens, such as Social Security and Medicare benefits due to the current workforce, the U.S. government would owe more than $64 trillion in total liabilities.16 In fact, if American families were to be sent a final bill to pay off these obligations, each would owe $810,000. …

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