IMF: Yes, America is profligate

It’s official. The United States is a “profligate” nation, according to IMF staff research that examines which countries respond to increases in public debt by trimming their fiscal sails. And that makes the nation surprisingly rare in the developed world.

The finding stems from efforts at the International Monetary Fund to take a long-term view of public spending, revenue, deficits and debt – patching together databases going back as far as 1800 and applying statistical tests to see how they interact. According to the authors, it’s perhaps the most extensive effort yet to apply “state of the art” statistical methods, developed by economist Henning Bohn, to measure the sustainability of public debt over a broad set of countries through the decades.

Denmark, we are not.
Denmark, we are not.

What that statistic means, technically, is that a country’s annual budget deficit does not get smaller (or its annual surplus larger) when its overall debt increases in relation to the size of its annual gross domestic product. In theory, a “prudent” nation would trim deficits or accumulate surpluses as overall debt grows, while a profligate one would not. The paper is careful to qualify that the findings are not a value judgment on debt itself. A “profligate” nation may have good reason and need to run up debts. And in the case of the U.S. there are other considerations, such as the size of the economy and the dollar’s status as an international reserve currency, that might make standard measurements of sustainability less relevant.

Still, by this methodology, the United States is one of only a few profligate countries in the developed world, where even big social-welfare states like Denmark earned a “prudent” label for overall fiscal management. The Danes may spend a lot on social protection. But they collect the taxes to pay for it.

The data put the U.S. in interesting company. The key table lists 42 nations, including most of the developed world. Only five earn a negative, or “profligate” rating on the “Bohn Test for Fiscal Sustainability” – the U.S., Japan, Israel, Costa Rica and Honduras. “Significant” war years are excluded, which would moderate the result for conflict-driven overspending.

But deficit hawks take note: the years since the 2008 fiscal crisis helped tip the U.S.'s overall Bohn rating into negative territory. In the period from 1950 to 2007 – an era that included epochs of strong growth, oil crisis and recession, high inflation, and technology-driven budget surpluses – the country earned a “prudent” score.

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