State Space Models

All state space models are written and estimated in the R programming language. The models are available here with instructions and R procedures for manipulating the models here here.

Saturday, December 21, 2024

World-System (1970-2060) US Debt Crisis

The US just had another debt crisis to join France (here), Germany (here) and Canada (here). Debt Crises have been quite the political spectacle, almost closing down the government in the US and toppling governments in European countries. Hitting the Debt Ceiling and Government shutdowns are nothing new for the US (here). Deficit Hawks have used the repeated crisis to impose Austerity on the US Government, threatening to dismantle Social Security, Health Care and Welfare programs while giving tax cuts to the wealthy. 

What is somewhat confusing about all this is that there is a branch of Economics called Modern Monetary Theory (MMT) that suggests that there can be no debt crises when governments control their own currency, as do the governments in the US, France, Germany and Canada. Populist  Deficit Hawks argue that everyone understands that we can accumulate too much debt and wind up in bankruptcy. MMT counters that if individuals go into too much debt they cannot simply print money to get out of debt as modern governments can. As long as there are slack resources in the US Economy, government deficit spending will not create inflation. If you are not familiar with the theoretical arguments, the controversies make interesting reading (here and here).

From the perspective of Systems Theory, Debt Crises reveal yet another Error Correcting Controller (ECC) that is being used to control outputs of the Political System. Regardless of theoretical and rational considerations, the DEBT ECC triggers an important feedback loop we need to understand. If governments have to go into debt to address the Climate Crisis or any other of the many Overlapping Crises, ideas about DEBT will assert themselves as a constraint on spending.

In the graphic above, I have displayed a history of US Debt from 1970 to the present and a forecast for the future out to 2060 by political administration. Debt has been fairly close to the (increasing) attractor path except during the Clinton Administration when it went down, during the Obama Administration when it went up and during the Trump I Administration when it went way up (above the 98% prediction interval) as a result of the COVID-19 Pandemic. The USL20 model's forecast for the future is that US Debt will be declining but with rather wide prediction intervals. Given the historical data, almost anything can happen.

Notes

Data are taken from the World Development Indicators (WDI). All variables are in standard scores. The methodology used to create forecasts is similar to the one used by the Atlanta Federal Reserves GDPNow app. Prediction intervals are generated using a Bootstrap algorithm in the R programming language. The Akaike Information Criterion (AIC) is used for model selection.

You can run the WL20W US BAU Model here. From my perspective, the future of US Debt depends on the future of the US economy, which is unknowable but about which I have a forecast (here).
 

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