Paying Down Rich Nations' Debt

Transcript of Notes on the News, March 26, 2010.

The following is a transcript of Notes on the News, "Paying Down Rich Nations' Debt," first videocast on March 26, 2010.

Though it doesn't always feel like it, at least not in the rich nations like the U.S. and Europe, recovery from the Great Recession is well underway. The world economy as a whole will grow 4% this year, faster next. As the 2008/2009 crisis recedes, governments everywhere have to drain off the stimulus support that got them through it.

This poses three particular challenges. Get them wrong and we're back in trouble. First, get the timing for stimulus exit right. It will be different for different countries. Governments shouldn't move until they are sure recovery is firmly entrenched. China has made a start. The U.S., as Fed Chairman Ben Bernanke has recently indicated, will have to wait a while.

The second is a global rebalancing of savings to help make recovery sustainable over the long run.

The third--a particular challenge in rich nations--is to cut public debt ratios back to prudent levels. The Great Recession created a great decline in government revenues. Stimulus spending widened the resulting deficits further. The IMF reckons that in the rich countries government debt will have risen from 75% of GDP pre-crisis to 110% of GDP by 2014. Even if stimulus spending is cut back, it only accounts for 10% of the forecast increase in debt--far outweighed by the growing demographic pressure that will raise health and pension spending.

Many of those obligations are in the public sector and thus politically difficult to cut back. Over the medium term, large public debts could lead to high real interest rates and slower growth. Without containment of health and pension spending--perhaps though better targeting of social benefits--the recovery in the rich countries from the Great Recession is going to be a long slow haul.

David Serchuk, 03.29.10, 06:00 AM EDT