How long can America keep going before it defaults

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A) The stimulus is now mostly a part of the debt. The deficit is the yearly shortfall. It's not really a part of the yearly deficit because it's already been spent.

B) Google keynesian economics. A big chunk of today's deficit is the reduction in tax revenue from the damaged economy. Keynesians believe that if you can stimulute economic activity with government spending you can moderate the ugly side of the business cycle and possibly come out ahead in the long term. It's a wager on a long term payoff. A similar principle to the Republican desire to gamble that tax cuts will eventually pay for themselves by stimulating activity. Why else would ROmney call for doubling the Bush tax cuts while we are in such a fiscal hole?

Just as cutting 1.2 trillion from the budget to balance it tommorrow would devastate the economy and collapse tax revenues. You could end up further behind. Which is what some fear (even Republicans) if we go over the "fiscal cliff" of automatic cuts next year. The economy isnt simple. There is spending, revenue, and how the general economy reacts to adjustments in either one.

The stimulus itself was a hybrid. Half of it was tax cuts of one sort or another. Half was more direct spending. It was very far away from what a pure Keynesian like Paul Krugman would have wanted.

In a world where people keep turning to the dollar for safety, Congress can indulge its political cowardice and keep taxes down for another year. For the US to recover, two things need to happen:

First, government spending needs to flatline. Notice: flatline, not reduce. When government spending is reduced, fewer dollars are being transferred into the economy, and that has contractive effect. The easiest way for the government to create a recession would be to cut $600 billion in spending. In an economy of $14 trillion, that represents an immediate 4% contraction, not counting the spinoff contraction. But if government flatlines spending, then in a growing economy, government spending will represent a smaller percentage of GDP. This has been the Canadian approach for the last few years, and although we have not reduced government spending by a dime, we have reduced public sector spending as a percentage of GDP (and we are the only G8 nation to accomplish that).

Second, taxes need to rise, and the tax burden needs to shift from corporations to individuals. The United States has the highest corporate taxes and among the lowest personal taxes in the OECD. That is simply unsustainable. Corporate tax rates need to come down, and personal rates need to rise in order to fund government at a level commensurate with the spending that is required. If public sector spending is 20% of your economy, it stands to reason that you will need an aggregate tax rate in that ballpark to fund it.

Sounds right. With the exception that US corporations don't really pay the rate. There are a million loopholes which lead to US corporations paying a smaller % of total federal revenue than in most developed countries. IIRC GE paid nothing in 2010. Corporations spend a lot of time lobbying for exemptions for this or that.

Also with $600 billion to 1.2 trillion in cuts, or whatever, those newly unemployed government workers wouldn't need to buy lunch time sandwiches or be able to buy new tvs. Then the layoffs widen. Eventually the unemployed all march down and demand their unemployment insurance. So the government not only loses the tax revenue on economic activity but they also have to pay out to cover unemployment benefits that people have paid toward and expect. And so the government eats a double sh*t sandwich for it's efforts.

That is the thing for cities and states of late, getting their finances in better order or face a credit down grade from the rating agencies. Saw today that California was working in secrete to try and rein in their pension debts. This should be interesting.

"California Prepares Major Pension Bill in Secrecy"

http://blogs.the-american-interest.com/ ... n-secrecy/

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