we must cut spending and raise taxes to get the debt under control
I’m sorry, but This. Is. Not. True.
If you look at future debt-GDP ratios and think they are too high, how can you reduce them?
1. You can improve the primary balance by raising taxes and/or reducing spending.
2. You can raise the growth rate.
3. You can lower the real interest rate on government debt.
4. You can raise inflation. (This may also help with 3, depending what we think of Fisher’s law.)
EDIT: 5. You can default. (Thanks, Bruce Wilder.)
One is not the only choice. We can, of course, debate which of these choices offers the best tradeoff between feasibility and desirability. But it is not true that reducing the long-run debt-GDP ratio necessarily involves reducing spending or raising taxes. And anyone who want a rational discussion of fiscal issues, needs to stop lying to people that it is.
How bad things are, can be seen by the fact that someone as smart as Barkely Rosser has been convinced that a reluctance to raise taxes is the problem for aggregate demand. When the debate comes down or whether we should raise taxes or cut spending, the real question has been answered, and answered wrong. At that point it’s just a question of what flavor of austerity we want. Thank god at least there’s still Daniel Davis.
If we wanted to move this debate forward, the next step would be to look at periods when the long term debt-GDP ratio was reduced in rich countries. How much was due to the primary balance that Thoma takes for granted is the only solution, how much was due to faster growth, how much to lower interst rates and how much to higher inflation?