Page 60 - Accelerating out of the Great Recession

THE NEW REALITIES

time around. In the United States, for example, Alan Auerbach
and William Gale from The Brookings Institution expect deficits
to average at least $1 trillion per year—equivalent to nearly 7 per-
1
cent of U.S. GDP—for the next 10 years. This is an observation
with which the U.S. Congressional Budget Office agrees.
But governments do not have unlimited capacity to take on
new debt. And for countries that were already burdened by debt
in the run-up to the financial crisis, this is an issue. Risk pre-
miums for Spain, Greece, and Ireland have already increased.
And even the United States has a limit to its capacity to take on
new debt as it compensates for the shortfall in domestic savings
by depending on foreigners to buy its Treasury bonds. Its most
important foreign investor is China, which recently has
expressed some discomfort with the huge level of new U.S. gov-
ernment debt.
As the global economy improves, governments will come
under mounting pressure to rebalance their budgets. The dan-
ger is that this action could push the world back into reces-
sion—which is exactly what happened when President Franklin
D. Roosevelt attempted to rebalance the U.S. government’s
budget in 1937. Christina Romer, chair of the Council of
Economic Advisers, shares this view. She has argued that many
more years of aggressive government spending will be necessary
to restore the economy to full health. 2
Certainly, government spending will be significant for years
to come, and this will lead to higher taxes and an additional
incentive for some politicians to seek inflation. A broad major-
ity of the executives whom we surveyed expect governments to
continue running deficits for many years to come—and 56 per-
cent expect that, as a result, taxes will be higher in the future.
Tax increases, in turn, would decrease disposable income and

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