The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [44]
This chapter will start with the immediate crisis, the legacy of the financial crisis for government debt. Then I’ll describe the existing and often hidden debt, mainly due to implicit welfare and pension promises made by governments. What matters about the scale is whether or not the repayments can be made relatively easily, so the following sections will turn to the arithmetic of public debt—when does it become so large that it depresses economic growth to the extent that the debt can’t actually be repaid?—and then to the question of who has done the lending. I’ll argue that for both reasons many governments will effectively default on their debts, in one of several ways.
THE DEBT LEGACY OF THE FINANCIAL CRISIS
The numbers are so large that they are hard to make sense of, but it’s worth starting out with an idea of the headline figures. IMF estimates as of mid-2009 suggested that the total cost of the financial crisis has been $11.9 trillion (that’s $11,900,000,000,000). This includes guaranteeing debts and giving banks new capital as well as the upfront cost of the banking rescues. The total might change. Some of this government bailout money might not be needed but even if only half is spent it will amount to an average cost of about one thousand dollars for every person, children included, in the world. The amount per taxpayer in the rich economies is much higher. Some countries are worse off. The United Kingdom’s situation is worst of all with an upfront cost of about one-fifth of the economy’s whole annual output and a total potential cost of more than 80 percent of GDP, but the United States isn’t far behind.4
It’s a lot of money—and that’s only the start of the cost. In country after country, other banks that were in danger of failing because of their spiraling losses in the bond and derivatives markets were bailed out by governments. A worldwide recession followed, prompting central banks to slash interest rates and provide massive cash injections to the banks, and governments to step in with stimulus packages—enormous sums of taxpayers’ money in the United States and elsewhere. Most governments put in place measures to avoid a severe recession, by spending more money on public services and cutting taxes. The efforts have succeeded in the sense that the recession has been less severe than had initially been feared, although also prolonged. But the resulting budget deficits are the largest since the Second World War, at 10 percent of GDP on average for the big economies, and 13.5 percent of GDP for the United States. The cost of bank bailouts has come on top of “structural” deficits that were already much larger than was warranted by the state of the economy before the crisis. The U.S. budget deficit trebled between 2008 and 2009. The burden on taxpayers who must finance the interest and eventual repayment will be long-lasting. In most of the leading economies, the ratio of government debt to GDP will have risen by 2014 to the region of 100 percent of GDP, compared with 60–70 percent before the crisis. Again, the picture differs from country to country. Japan, which started with a high government debt ratio because of its 1990s economic crisis, will end up with a figure of about 240 percent likely by 2014.5
Many people will already have glazed over under this onslaught of percentages; the point is that the numbers are truly large. They are larger than government debts ever before incurred outside periods of wartime, when fundamental national interests are at stake and people are therefore ready to support the financial sacrifices their governments ask of them in order to service large debts.
What’s more, these large figures need to be added to another debt burden.
THE PENSION AND WELFARE BURDEN
That is the burden of future government payments to the recipients of state pensions and other welfare payments,