Free Markets, Free People


The looming debt crisis

The other day Federal Reserve chairman, Ben Bernanke, addressed a meeting of the Rhode Island Public Expenditure Council. During his speech, he did something Fed chairmen don’t usually do. He spoke about US fiscal policy. His words don’t really relay anything most of us don’t really know, but it is the fact that he felt compelled to say them that make them newsworthy. After I read them, I felt his uneasiness and, like many Americans, his frustration that the political leadership doesn’t seem to understand the problem or its urgency.

A few excerpts from his speech:

[I]n the United States, governments at all levels are grappling not only with the near-term effects of economic weakness, but also with the longer-run pressures that will be generated by the need to provide health care and retirement security to an aging population. There is no way around it–meeting these challenges will require policymakers and the public to make some very difficult decisions and to accept some sacrifices. But history makes clear that countries that continually spend beyond their means suffer slower growth in incomes and living standards and are prone to greater economic and financial instability.

Whether you agree or not that government must address health care and “retirement security”, there’s not much to argue with in the highlighted last sentence. This is Econ 101 stuff. This is something Americans running their own households know almost instinctively. The problem – and frustration- is that Americans suppose this point must be just as obvious to their elected leaders, yet with the wild spending continues. While politicians talk about fiscal sanity and pass bills like PAYGO (that they then promptly ignore or make exceptions too), nothing is really being done about the looming economic and financial instability in the debt load brought on by excessive and persistent government spending.

Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. [...] In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth. Larger government deficits increase our reliance on foreign lenders, all else being equal, implying that the share of U.S. national income devoted to paying interest to foreign investors will increase over time. Income paid to foreign investors is not available for domestic consumption or investment. And an increasingly large cost of servicing a growing national debt means that the adjustments, when they come, could be sharp and disruptive. [...]

Again, almost everyone recognizes the truth of Bernanke’s words. If you run household, you know that if you amass huge credit card debt you are going to see an increasing amount of your income stream going to service that debt and less of it available for your use. That means less consumption because you are sending that money to a “foreign lender” – the credit card company. That in turn may translate into less of a house than you wanted, a smaller car or no college for the kids. If you run a business you know that increasing the amount of debt you carry and service means an increasing limit to your ability to expand, invest, hire new employees, improve benefits or give raises. At some point, your priorities take second place to the priority of paying back what you owe.

That’s where we’re headed as a country and more quickly than we might want to admit. Most would like to believe that this problem is understood and a high priority for our leaders. But that doesn’t seem to be the case and we see budget projections out 10 years that pile more and more debt on our already staggering economy.

The politicians continue to tell us it is necessary. They assure us that once the crisis passes they’ll address this problem in earnest. But will it then be too late? James Bacon Jr. addressed that recently in the Washington Examiner, discussing the “tipping point” in which the percentage of debt to the GDP hurts economic growth. According to a paper he cites by the World Bank, that assumed tipping point occurs when public debt equals around 77% of the country’s GDP.

Where are we?

According to International Monetary Fund calculations, the U.S. debt/GDP ratio in 2009 was 83.2%, above the tipping point, and will climb to 109.7% by 2015. […] That implies that the U.S. is experiencing a small growth penalty today: about one-tenth of a percentage point yearly. By mid-decade, however, the growth penalty could swell to 0.56% yearly — more than a half percentage point.

Unfortunately there’s no end to deficit spending in sight. Part of that is because politicians in this culture are not rewarded for doing tough and unpopular things. They’re usually turned out of office. And with the rise of career politicians who enjoy the trappings and perks of power and don’t want to give them up, most politicians are risk averse. Their preferred method of dealing with the “difficult decisions” and “sacrifices” Bernanke says need to be made is to kick the can down the road.

The point Bernanke is making is we can no longer afford to do that. Which brings me to the final excerpt from his speech:

Herbert Stein, a wise economist, once said, "If something cannot go on forever, it will stop." One way or the other, fiscal adjustments sufficient to stabilize the federal budget will certainly occur at some point. The only real question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people plenty of time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.

We have a choice right now – but either way, this is going to hurt. We can take charge and attempt a controlled crash landing to try and save as many as we can, or we can fly this problem until it naturally runs out of gas and deal with the consequences then. Unfortunately, it appears the latter choice is likely to be the only choice, given the current fiscal policy of this administration.

~McQ

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6 Responses to The looming debt crisis

  • What you dense righties don’t get is that this is all easy to solve. All we have to do is sit down together, and discuss our differences, and come to a pragmatic compromise that addresses the problems. That’s all there is to it! Presto! Problem solved!

    Well, that, plus we have to admit that our current consumerist culture is unsustainable. That’s Reagan’s fault, by the way. He started it. We just can’t live beyond our means. Nope. But government CAN keep on adding social programs such as Obamacare, because that’s a moral right and thus not living beyond our means. I decree it.

    Of course, the reason our problems won’t be solved for a long time is that you thick righties won’t sit down with us and compromise. No, you would rather stick by your silly “principles” when anyone can tell that it’s a lot more important to come to an agreement and compromise on how to address our problems than to stick to any obsolete “principles.”

    You won’t get on board with ending rampant consumerism either. Your fetishes about “individual choice” and “freedom” prevent you from allowing wise leftists to restrict choice – for the good of everyone, of course.

    So, to quickly summarize, it’s all Reagan’s fault (with an assist by the odious Bush), the problem is totally open to solution, but the main obstacle to solving the our problems is that dense righties won’t jettison obsolete ideas and give wise leftists enough control. Why can’t you all see this?

    • Those thick, dense righties worry that you’ll take away their soda and sugary snacks, you meanie!

  • You know, Bush tried something like this with Social Security; how did that work out?

    And Medicare is really the bigger problem. Bush went the other way with Medicare part D, and made things worse, but he didn’t make things worse enough for the Democrats, who went even farther with Obamacare which expanded on part D.

    What we are dealing with is Republicans like Bush, who was wrong about 50% of the time, and Democrats, who are wrong 100%.

  • I suggest (not entirely tongue-in-cheek) that there’s nothing to worry about.  So long as the power players around the world agree to keep playing the game, there is no reason for it to come crashing to a halt.  Consider:

    Money – greenbacks, euros, yen, yuan, etc. – is bits of paper that we all agree is worth something.  As I understand it, Tax Cheat Timmy has been burning up the printing presses, churning out billions of new greenbacks… but the value of the dollar hasn’t changed dramatically so far as the average person is concerned.  The same might be said of other world currencies.  So long as people believe that a bit of colored paper with some numbers on it has value, it will continue to have value.

    People believe that those bits of paper have value because their political and economic masters tell them that they do.  So long as various governments and banks pretend that the US dollar is worth X euros, Y pounds and Z yen, then it has that value no matter how many billions of dollars are actually in circulation.  And so long as the banks and governments will act as though a piece of paper has some real value, people will behave as though it does.  I can, for example, go to my local coffee shop and hand over some bits of paper in return for a cafe Americano because the shop owner agrees with me that my paper is a suitable trade; he does that because he can take enough paper and use it to pay the bank for the mortgage on his house because the bank agrees that this is a suitable trade.  And so on up the chain until Red China agrees to give Uncle Sugar a whole lot of (mostly notional) paper in exchange for a pledge from us that we’ll give them more (mostly notional) paper back at some point in the future*.  Hell, we could pay our entire debt TODAY by dint of The Dear Golfer ripping off piece of paper from his scratch pad, writing $(huge number) on them, and presenting it to the various debt holders SO LONG AS THEY AGREE TO GIVE HIM OTHER PIECES OF PAPER THAT READ “PAID IN FULL”.  This is the beauty of fiat currency.

    The only way that the game ends is if somebody big decides to stop playing and declare that the paper has no value.  Doing this is in nobody’s interest, so it doesn’t seem likely to happen. 

    I now await people who paid attention in economics to rip this argument apart!

    —-

    (*) Consider that the yuan – the currency of a communist state – is worth something.  Fifty years ago, it would have been worth nothing.  Why is the yuan worth something while the Zimbabwe dollar is suitable only for (ahem) hygenic purposes?  Because people collectively agree that this is so.

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