Hmmmm - way interesting article. I would urge you to click the link and read it.

By SIMON JOHNSON
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overly indebted countries typically have a hard time financing themselves when the world becomes riskier — yet turmoil in the Middle East is pushing down the interest rates on United States government debt. We are still seen as a safe haven.

Nonetheless, leading commentators and politicians repeat the line “we’re broke” and argue that there is no alternative to immediate spending cuts at the national and state level.

Which view is correct? And what does this tell us about where our political system is heading?

Our main fiscal issues are three (see my testimony to the Senate Budget Committee earlier this month).

The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-8. The ensuing recession and associated loss of tax revenue will end up increasing our government debt, as a percentage of gross domestic product, by around 40 percent. Very little of this debt increase was due to the fiscal stimulus; mostly it was caused by lower tax revenue, because of the slump in output and employment.

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Second, we need to control health care spending as a percent of G.D.P. The issue is most definitely not about cutting the current level of such spending or immediately reducing the benefits in Medicare. But in the projections, by 2030 or 2040, the growth of health care spending ruins us all — whether or not we get the government to pay for it.

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Third, our tax system is completely antiquated. For the same level of tax revenue relative to G.D.P., we could greatly reduce the distortions (e.g., disincentives to work) just by modernizing. The right and the left agree that we should tax consumption more and income less, but neither is willing to make any kind of meaningful move toward a value-added tax (VAT).

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How does the Republican initiative to cut spending fit in with these budget issues? Not very much is the generous answer. The Republicans’ proposed cuts at the federal level are for discretionary nonmilitary spending, but this is small as a percentage of the budget (and therefore of the economy).

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Both sides of our political elite have contributed to the sense of fiscal crisis. And as we continue down this path — dangerous big banks, out-of-control health care spending, significant tax cuts, small changes in nonmilitary discretionary spending and irresponsible rhetoric on both sides — we are well on our way to a real crisis.

Read more here: http://economix.blogs.nytimes.com/2011/02/24/does-the-u-s-really-have-a-fiscal-crisis/?partner=rss