By Robert Sun, Carnegie Mellon University
For the past few months, bankers, economists, and ordinary people everywhere were focused on Greece, specifically Greek debt and its 12.7% deficit of GDP. All eyes were turned on a potential default, which, considering the people holding Greek debt, would have shaken investor confidence around the world. When that seemed no longer an option, everyone was waiting for Germany, France, the European Nation, or the International Monetary Fund to bailout Greece. And now, with Greece out of the picture, everyone is keying in on the other PIGS (Portugal, Italy, Greece, Spain) nations.
But what about closer to home? Or rather, what about home? Granted, Greece was projected to run up debt to 123% of GDP in 2010 and Italy's public debt is projected to climb from 108.1% of GDP in the beginning of 2009 to around 117% of GDP for 2010. But the United States has seen its government spending skyrocket as well.
As president Barack Obama stated in his State of the Union address, “Let's invest in our people without leaving them a mountain of debt. Let's meet our responsibility to the citizens who sent us here.”
From 2005 to 2007, the U.S. deficit was only less than 2% of GDP on average. But analysts project that in the best case scenario, that figure will more than double by 2020 and consequently, the debt-to-GDP ratio will soar to around 77.2% of GDP, or levels unseen since after the the massive financing needed for World War II. The Congressional Budget Office predicts economic growth to be far less optimistic for the road ahead, which means we could see debt levels climb far faster.
Now, granted, in wartime, spending should increase. Recessions also call for a larger deficit. President Obama was unfortunate enough to land in both and we should expect the government to reign in spending after one, or possibly both in the longer-term future, is no longer a cause for concern.
But in the meantime, how can we expect to finance spending without blowing our debt ratio out of the water? House speaker Nancy Pelosi mentioned a value-added tax option as a way to increase government revenues. Currently, many European nations use a valued-added tax and consider it one of the more efficient and lucrative forms to bring in tax dollars. Whereas a sales tax is charged at the retail end when consumers purchase a good, a value-added tax is collected wherever a firm adds value within the stages of production. For example, a tax on a manufacturer after it takes raw materials and turn them into finished goods.
Some concerns with the value-added tax are the same with most taxes, it would raise prices, lower real wages, and provide a disincentive for production and slow economic growth. If such a tax would be implemented, bet on other markets, perhaps emerging markets, outperforming the U.S. for a long time. However, if spending goes unchecked without a way to finance it, look for inflation or even a credit rating downgrade (which would be devastating for the U.S.). In either scenario, look to diversify your portfolio away from strictly American assets with no exposure abroad.
