August 9, 2010

A CHALLENGE TO INSTAPUNDIT READERS: Reader John Steakley writes:

Staggering deficits. Exploding national debt. Grossly underfunded public pensions. Aging populace. Social Security on track for insolvency. Investors running for precious metals. Higher education bubble. Stagnant economy. Massive new government healthcare program. Words like “unsustainable” in CBO reports.

I have racked my brain and debated with anyone who was willing. I can’t come up with a way out of this that doesn’t involve printing vast amounts of cash, double-digit inflation and interest rates, and the end of the dollar as a global currency because we “soft default” trillions of the national debt. What productive capacity we have left would be gutted by the tax increases needed to honestly pay what we are going to owe. And the people we owe (China, seniors, public pensioners, etc) aren’t going to just write off the debt like a bank short-selling a beach house.

So my challenge to your readers is this: “How do we get out of this WITHOUT printing money?”

Any ideas?

UPDATE: Charlie Martin writes:

I wrote abot this a couple of years ago in PJM. There are a nearly infinite number of solutions, but the key is this: if the rate of GDP growth is greater than the rate of government spending growth, everything will come out.

John Taylor at “Econ 101” shows how this works with Ryan’s plan.

Taylor’s second chart shows it clearly: the Obama plan has spending increasing linearly (or faster) with a positive slope. It runs away from revenues. Ryan’s plan is just barely negative over all, it doesn’t run away. But if you assume the rate of growth in GDP is larger, the lines cross and we’re back in surplus sometime in the future.

So the short answer is “it’s not the taxes, it’s the spending”.

Indeed.

Here’s the graph Charlie’s talking about.

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