Here is from a recent Bofa ML’s research report about the US debt debacle:
“A gradual shift into surplus: The great irony of the US debt debate is that the deficit can be fixed without crippling the economy. It happened once before: from 1983 to 2000 the budget balance improved from a deficit of 6.0% of GDP to a surplus of 2.4%. This improvement partly reflected the cyclical state of the economy, with the unemployment rate falling from 9.6% to 4.0% over this period. Equally important, it required tough policy choices and a gradual drop in the structural deficit.
Chart: A gradual shift into surplus (budget balance as a % of GDP)
Growth in the face of austerity: We believe there were three reasons for this success. First and foremost, the two political parties worked together to make some very tough choices. The second key to success, in our view, was that the austerity happened gradually, without sudden shifts or brinkmanship. The final key to success, in our opinion, was a willingness to put everything on the table.
Chart: Growth in the face of austerity (percent, YoY real GDP growth)
Source: Bank of America Merrill Lynch