IOUSA Not OK: An Analysis of the the Deficit Disaster Story
The movie IOUSA portrays a picture of the United States as a country hopelessly addicted to debt.
According to the film, the country is about to fall off a cliff if the budget and the economy continue
on their current course. While there are certainly many grounds to be concerned about the country’s
economic condition, the view presented in IOUSA is one-sided and misleading.
This analysis puts many of the issues raised in the movie in a broader context and features a minuteby-
minute viewer’s guide of inaccurate or misleading statements in the film. It is important that the
public be well informed about economic issues and not allow itself to be railroaded into illconsidered
policy choices.
There are seven key points that the public must understand in order to fully grasp the issues raised
in the film:
1) The national debt is not literally a generational transfer. This is easy to see because everyone who
holds the debt (government bonds) today will eventually be dead, leaving the possession of the
bonds to their children and grandchildren. In other words, the interest on the debt will be paid from
some members of future generations to other members of future generations. (We will deal with
issues created by foreign ownership below.) The debt can involve a generational transfer only insofar
as it slows the economy’s growth, so that it produces less in the future.
2) The high dollar (not the budget deficit) is what causes the trade deficit. No one buys foreign made
goods at Wal-Mart because the government is running a budget deficit. They buy foreign made
goods because a high dollar has made foreign goods cheaper than comparable U.S.-made goods.
The high dollar also makes U.S. exports more expensive for people living in other countries.
3) A large trade deficit requires that we either have a very large budget deficit or extremely low
private savings or some combination. This is an accounting identity. If we are borrowers
internationally then we must have very low domestic savings. And we are borrowers internationally
because we have an over-valued dollar. In other words, the high dollar requires us to either have large
budget deficits or to have low private savings.
4) The stock and housing bubbles led to an enormous reduction in private saving through the wealth
effect. Research shows that $100 in additional stock wealth will lead to $3 to $4 of additional
consumption, meaning that saving drops by this amount. The housing wealth effect is estimated at
being $4 to $6 of additional consumption for every $100 of housing wealth.
This means that a $10 trillion stock bubble would be expected to reduce annual saving by $300
billion to $400 billion. An $8 trillion housing bubble would be expected to reduce annual saving by
between $320 billion and $480 billion. These bubbles have been the main cause of the low savings
rate in the United States over the last 15 years.
5) During times of economic weakness (like now), deficit spending actually helps the economy to
grow. In such times deficit spending is also likely to increase investment. In this case, deficit
spending makes our children and grandchildren richer than if we did not have deficit spending.
6) High and rising private sector health care costs in the United States are responsible for the bulk of
the federal budget deficit problem. (Government health care programs like Medicare and Medicaid
pay for health care provided by the private sector.) If health care costs are not contained, then the
economy will be devastated regardless of what we do with the federal budget. If they are contained,
then there is no budget problem.
7) Social Security has a dedicated stream of financing that keeps it fully funded until 2049 according
to the most recent projections. Given this stream of funding, it would be no more justifiable to cut
back benefits in the near future than to default on the federal debt....
Read entire article at Dean Baker and David Rosnick at the website of the Center for Economic and Policy Research
According to the film, the country is about to fall off a cliff if the budget and the economy continue
on their current course. While there are certainly many grounds to be concerned about the country’s
economic condition, the view presented in IOUSA is one-sided and misleading.
This analysis puts many of the issues raised in the movie in a broader context and features a minuteby-
minute viewer’s guide of inaccurate or misleading statements in the film. It is important that the
public be well informed about economic issues and not allow itself to be railroaded into illconsidered
policy choices.
There are seven key points that the public must understand in order to fully grasp the issues raised
in the film:
1) The national debt is not literally a generational transfer. This is easy to see because everyone who
holds the debt (government bonds) today will eventually be dead, leaving the possession of the
bonds to their children and grandchildren. In other words, the interest on the debt will be paid from
some members of future generations to other members of future generations. (We will deal with
issues created by foreign ownership below.) The debt can involve a generational transfer only insofar
as it slows the economy’s growth, so that it produces less in the future.
2) The high dollar (not the budget deficit) is what causes the trade deficit. No one buys foreign made
goods at Wal-Mart because the government is running a budget deficit. They buy foreign made
goods because a high dollar has made foreign goods cheaper than comparable U.S.-made goods.
The high dollar also makes U.S. exports more expensive for people living in other countries.
3) A large trade deficit requires that we either have a very large budget deficit or extremely low
private savings or some combination. This is an accounting identity. If we are borrowers
internationally then we must have very low domestic savings. And we are borrowers internationally
because we have an over-valued dollar. In other words, the high dollar requires us to either have large
budget deficits or to have low private savings.
4) The stock and housing bubbles led to an enormous reduction in private saving through the wealth
effect. Research shows that $100 in additional stock wealth will lead to $3 to $4 of additional
consumption, meaning that saving drops by this amount. The housing wealth effect is estimated at
being $4 to $6 of additional consumption for every $100 of housing wealth.
This means that a $10 trillion stock bubble would be expected to reduce annual saving by $300
billion to $400 billion. An $8 trillion housing bubble would be expected to reduce annual saving by
between $320 billion and $480 billion. These bubbles have been the main cause of the low savings
rate in the United States over the last 15 years.
5) During times of economic weakness (like now), deficit spending actually helps the economy to
grow. In such times deficit spending is also likely to increase investment. In this case, deficit
spending makes our children and grandchildren richer than if we did not have deficit spending.
6) High and rising private sector health care costs in the United States are responsible for the bulk of
the federal budget deficit problem. (Government health care programs like Medicare and Medicaid
pay for health care provided by the private sector.) If health care costs are not contained, then the
economy will be devastated regardless of what we do with the federal budget. If they are contained,
then there is no budget problem.
7) Social Security has a dedicated stream of financing that keeps it fully funded until 2049 according
to the most recent projections. Given this stream of funding, it would be no more justifiable to cut
back benefits in the near future than to default on the federal debt....