Dark Times Ahead For The U.S. Debt?

Richard Posner has a good piece out this morning where he dissects the question of how the government will solve its debt problem. Since the President has refused to raise taxes on those earning less than $250,000, that leaves few options. After all, the rich might have a lot of money, but even they can't pay off the enormous debt Washington has been racking up over the past decade. Is U.S. insolvency a real possibility?

Probably not. At least, not according to Moody's. The Wall Street Journal, coincidental to Posner's piece, has an article out today about the rating agency looking at downgrading certain government debt ratings. The U.S. is not one of them. It says:

The ratings firm suggested the U.S., U.K. and most other members of the 16-nation euro zone aren't at risk. Those most likely to be downgraded already have negative outlooks, it said. They include Ireland, Kuwait and the three Baltic nations of Estonia, Latvia and Lithuania.

Among individual countries, the U.S., U.K. and a handful of others are likely to be "flying at lower altitudes" within triple-A territory, she said. "Nonetheless, we are monitoring them closely for any suggestion that their debt parameters, including the weight of contingent liabilities, and economic vitality are less robust than we now assume. Further rating adjustments would follow if the global economy receives another major shock or if the recovery in world trade takes longer to materialize."

But even without that immediate fear, Posner is right that the Obama administration has a problem. They can't possibly raise taxes anytime soon without kicking the economy while it's down. As a result, it will almost certainly have to wait until things look much better before making a move. Then with its pledge not to raise taxes on the lower or middle classes, what ways of increasing its revenue are left in its arsenal? Posner concludes by suggesting some ways it might raise taxes:

Perhaps the door has been left ajar for other forms of tax increase, such as a federal value-added tax; cutting deductions (which do not affect the nominal tax rate); and increasing federal income tax rates in a year or two, when (one hopes) the Gross Domestic Product will have returned to its trend line.

Of course, all of those possibilities actually do raise taxes on the lower and middle classes, just more sneakily. Yet, with untold billions in debt mounting in Washington, the government probably won't have any other choice -- especially if Megan is right about the difficulty it would have in inflating the debt away.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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