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Lacy Hunt on Our Economic Future

November 6, 2012

by Robert Huebscher

The US runs a trade deficit of approximately 4% of GDP.  It is the consumer of last resort for the rest of the world; the economies of surplus countries depend on the US market to sell their goods.  The US can neither increase exports nor reduce imports over the short term without inflicting economic hardship on itself and the rest of the world.

This line of reasoning is bolstered by the argument that it is appropriate to shift the indebtedness from the private to the public sector, which effectively forces current and future taxpayers to bear the burden of repayment – only fair, since they'll also enjoy the benefit of a larger economy.

Hunt’s counter – and a sliver of agreement

I asked Hunt how he can reconcile his views with those who advocate for additional government borrowing as means to economic growth.

“We have tried the path of greatly increasing indebtedness,” he said, “and the recovery is the worst since 1945. Our GDP is growing at half the normal rate.”  Moreover, median household income has declined more than in prior recessions, he said. 

Hunt said the US has no choice but to impose some degree of austerity.  Indeed, he cited research confirming that austerity has been the most common solution when countries become too debt-laden.

Hunt cited a 2010 study by McKinsey, the global consulting firm, which examined 32 cases of excessive sovereign debt.  Of those, Hunt said that eight were not relevant; because the countries in question were too small to be relevant to the US.  

Of the remaining 24 cases, all of which were of major economies, he said the primary pathway out was austerity.  Excessive debt is equivalent to living beyond one’s means, according to Hunt, which in economic terms manifests in a decreased savings rate.  To correct the problem, the savings rate must increase, and Hunt said that can be achieved primarily by constraining debt so that it grows at a slower rate than the GDP – the definition of austerity in the McKinsey study.

The savings rate in the US has mostly been declining steadily since 1980; it did increase sharply during the last recession, but it remains at 3.3%, a historically low level:

Personal Saving Rate