No. 55

A trillion owed here, a trillion borrowed there – pretty soon you are talking about serious debt

STONE the crows, who’s running the American economy, Wilkins Micawber? Dickens’ character, whose response to debt was to keep spending and hope something would turn up, may as well be, because this is what Barack Obama, like George Bush before him, is doing.

But all that will turn up is debt piled on debt.

The US government spent $150 billion more than it collected in November. At least the feds are consistent, running deficits of $1.4 trillion in fiscal 2009 and $1.2 trillion in 2010. Next year’s deficit is expected to hit $1.5 trillion.[i] Then there is the cost of the $850 billion in tax cuts and sundry stimulus spending adopted last week to kick start the still staggering economy.[ii]

A trillion here, a trillion there and pretty soon you are talking about a nation that owes serious money.

And the yanks know it, as the report of President Obama’s Commission on Fiscal Responsibility and Reform makes clear:

By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid and Social Security. Every other federal government activity – from national defence and homeland security to transportation and energy – will have to be paid for with borrowed money.[iii]

Optimists argue that America is not Ireland, and that once the economy picks up the debt will decline, even disappear. It certainly has before. Tax increases through the 1980s, spending discipline, Bill Clinton’s 1996 time limit on welfare benefits and a relatively strong economy cut the deficit dramatically. By October 1997, the Congressional Budget Office projected a deficit of just $30bn, for the year, not the month, and the developing debate was what Washington should spend the imminent surplus on.[iv]

There were plenty of expensive ideas. Like President Bush’s 2001 income tax cuts and his 2003 extension of medical welfare, the prescription drug benefit. In 2003, President George W Bush estimated it would cost $400bn over a decade, but two years later projections of annual costs by the middle of this decade had increased to $100bn plus annually.[v] In contrast the Obama health insurance package is expected to be cost neutral, but people have a way of making supposedly low cost programs they do not pay for expensive for the state[vi].

And people are the problem for deficit hawks. Sure tax revenue will rise as the economy improves. But politicians will not want to defy the insatiable demands of the increasing army of elderly.

In 1950 there were 16 workers for every social security beneficiary, there are now 3.1 and by 2025 there will be 2.3 workers contributing to the system. If nothing changes the trust fund will be exhausted by 2035. To prevent this the deficit commissioners propose lower benefits and higher payroll tax for upper income earners and older retirement for the middle class.[vii]

With Americans assuming public support is a universal right, one in four households now receive social security benefits, the Crows wish them luck.[viii]

And then there is government spending on healthcare. According to the Congressional Budget Office, federal spending on the two major insurance programs was around 4 per cent of GDP in 2007 however on present trends by the time a child born that year turns 75 the state will be allocating 18 per cent of GDP to health.[ix] This clearly cannot continue but the best the commissioners can come up with are nips, tucks and talk of freezing payments to doctors.

To which the Crows say pull the other wing, for verily it hath bells upon it. If an ageing population makes cutting social security politically impossible, reducing health spending is inconceivable for anybody who has to answer to an ageing electorate.

There are other mendicants who would howl if the US ever resolves to live within its means – including Australia.

Despite being broke, the US still pays to keep, however imperfectly, what passes for peace all over the world, accounting for nearly half of global defence spending.[x] Including our part of it.

But while the US Pacific Fleet has unanswerable command of the ocean now the Chinese are intent on challenging it, with a building program for 75 long range conventional submarines and plans for three carrier battle groups.[xi] Which makes Kevin Rudd’s Defence White Paper proposal to replace our six Collins Class of bodgy boats with 12 new submarines less insignificant than irrelevant. It also explains why we have as great a vested interest in Washington spending beyond its means than any Midwest pensioner. [xii]

But don’t bother bracing for cuts to come, at least not until the electors understand they are the reason the state is living beyond its means. Until then, the politicians will keep giving people what they want now, without explaining why the government cannot afford it.

David Stockman explains why: “Despite their often fuzzy rhetoric and twisted rationalisations, congressmen and senators ultimately deliver what their constituents demand.”  And he should know, because as Ronald Reagan’s head of the Office of Management and Budget, Stockman tried to reform government spending in the 1980s.[xiii]

His message then was that the US had to fund government out of current taxation. His message now is exactly the same, “the old approach – balanced budgets, sound money and financial discipline – is needed more than ever.”[xiv]

Will anybody listen? Probably. Not even Republicans who insisted last week on keeping President Bush’s tax cuts for the richest Americans in place could ignore the need to raise more revenue. And not even the Democrats who attack Obama for even considering containing public sector spending can deny the necessity of lower public sector spending. But will anybody actually do anything about it?

The Crows haven’t got a clue, but we had better hope that they do – before the Americans run out of their own money and start running the printing presses to pay back all they have borrowed from China and Japan.

Stephen4@hotkey.net.au

Endnotes


[i] Jeff Bater, “US posts $150 billion November budget deficit,” Wall Street Journal, December 10 2010

[ii] “Austerity delayed,” The Economist, December 7

[iii] Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 1 @ http://www.fiscalcommission.gov/ recovered on December 10

[iv] New York Times, “Forecasts on the federal deficit are declining,” October 4 1997

[v] Ceci Connolly and Mike Allen “Medicare drug benefit may cost $1.2 trillion” Washington Post, February 9 2005

[vi] “Speak softly and carry a big chainsaw”, The Economist, November 18

[vii] Commission on Fiscal Responsibility, op cit 48

[viii] Commission on Fiscal Responsibility, ibid

[ix] Congressional Budget Office, The long-term outlook for health care spending, November 2007 @ www.cbo.gov recovered on December 12

[x] Eugene Robinson, “Defence trims: why not? Washington Post, November 16

[xi] Cameron Stewart, “As the US wanes, China gains,” The Australian, August 5, ABC, Correspondents’ Report, “The full story: China’s brand new sub,” September 26 @ www.abc.net.au/correspondents/content/2010/s3021890.htm recovered on December 11

[xii] Commonwealth of Australia, Defending Australia in the Asia Pacific Century: Force 2030 (Department of Defence 2009) @ www.defence.gov.au/whitepaper/docs/defence_white_paper_2009.pdf 64 recovered on December 11

[xiii] David A Stockman, The triumph of politics: the crisis in American government and how it affects the world (Bodley Head, 1986,) 403

[xiv] David Stockman, “Four deformations of the apocalypse”, New York Times, July 31

'2012