When U.S. markets watched as Paris metaphorically imploded just weeks ago, the consensus reaction was: \u201cLet\u2019s not do that.\u201d<\/p>\n
Unrest ripped through the French capital after protesters initially highlighted failings in the public school system. The action snowballed into widespread expressions of dissatisfaction with the cost of living and job prospects.<\/p>\n
The macroeconomic health of the European nation is not in great shape: unemployment was 8.3% in Q2, real GDP growth was 0.4%, and wage growth was 1.7% at the national level. And underpinning it all is public debt, currently at 116% of GDP, with 30-year bonds topping 5.4% at the time of writing.<\/p>\n
And the U.S. bond market, flirting with a wrap on the wrist for its own policymakers presiding over mounting debt<\/a>, stalled. In fact, 10- and 30-year Treasury yields even declined.<\/p>\n \u201cThere\u2019s a reason that the U.S. has pulled back a little bit in the last few weeks [and] why France has not,\u201d Heather Long, chief economist at Navy Federal Credit Union, told a Bipartisan Policy Center (BPC) event last week. \u201cIt\u2019s a couple of key indicators that differentiate us from France and suggest \u2026 that we still have a little bit of room to have these debates now, in the context of a K-shaped economy.<\/p>\n \u201cWe\u2019re at about 100% debt-to-GDP; they\u2019re at 120% debt-to-GDP.\u00a0They are further along that crisis curve, and they are growing at about 0.5%. We\u2019re growing at just over 2%.\u00a0That\u2019s a pretty big difference.\u00a0\u201d <\/p>\n While economists largely agree that policymakers are perhaps naive in their hopes to simply grow the U.S. out of a debt crisis, starting from a point of strength rather than stagnation gives the economy a better chance of rebalancing its debt-to-GDP ratio.<\/p>\n But Long added that France also differs from the U.S. in that the former has exhausted much of its revenue-generating capacity through taxes. Per the OECD,<\/a> the \u201ctax wedge\u201d (the difference between labor costs to the employer and the corresponding net take-home pay of the employee) for\u00a0French workers is 47.2%, according to its most recent data. The U.S., on the other hand, is down at 30%.<\/p>\n \u201cIt\u2019s certainly not easy to raise taxation in the U.S., but from a financial world perspective and the bond market perspective, there\u2019s a lot more room to experiment and to grow in the United States than there is in France,\u201d Long added. \u201cTo me, the biggest warning sign from France is really not just the K-shaped economy effect, but the generational effect that\u2019s going on and to see young people really driving this latest protest \u2026 from the disparities that they\u2019re seeing generationally, and that seems like a pretty big foreshadowing [of] what we could see here as we creep towards 120% debt to GDP.\u201d <\/p>\n The generation question<\/p>\n As with any debt, the question of repayment isn\u2019t if but when\u2014and that\u2019s the question budget experts are asking the public and politicians to think about. <\/p>\n