This paper analyzes US budget debates in the context of the G20’s turn toward austerity at the 2010 Toronto Summit. It begins by looking at claims by Rinehart and Rogoff and the IMF that rising government debt to GDP ratios pose serious threats to economic growth. Then the paper considers Alesina and Ardagna’s contention that deep cuts in deficits somehow stimulate economies. The paper shows that none of these arguments are empirically well founded, especially for major reserve currency countries like the United States, which cannot depreciate without crushing the rest of the world.

We analyze competing accounts of how to measure the deficit over time and draw special attention to the Congressional Budget Office’s unheralded acknowledgement in August, 2010, that financial assets held by the government should be netted out of U.S. debt calculations. The paper argues that not entitlement spending or Social Security, but the excessive costs of oligopoly in health care, defense spending, and another possible financial crisis are the major threats to the U.S. budgetary position. In an era of unbridled money politics, concentrated interests in the military, financial, and medical industries pose much more significant dangers to U.S. public finances than broad based popular programs like Social Security, which is itself in good shape for as many years as one can make credible forecasts.

The paper compares several different simulations and concludes that the risk to U.S. public finances, as measured by the debt/GDP ratio in 2020, is much greater on a trajectory of austerity than from any risks incurred by the very low public cost of borrowing to spur investment in infrastructure, education, and science that would generate large social and private gains in productivity.