Throughout America’s spending binge, which really got going in the 80s, ignoring the mounting deficit has become the standard course of action. We’ve never (and still haven’t) paid a price for running up such a big tab. It’s been all gravy so far.
And as Morgan Stanley analyst Richard Berner notes (via Paul Kedrosky), that’s the problem. The lack of consequences to our spending has hardened us to the belief (however much Obama or anyone else proclaims to “lose sleep” over the matter) that deficit spending can go on forever.
America’s long-awaited fiscal train wreck is now underway. Depending on policy actions taken now and over the next few years, federal deficits will likely average as much as 6% of GDP through 2019, contributing to a jump in debt held by the public to as high as 82% of GDP by then – a doubling over the next decade. Worse, barring aggressive policy actions, deficits and debt will rise even more sharply thereafter as entitlement spending accelerates relative to GDP. Keeping entitlement promises would require unsustainable borrowing, taxes or both, severely testing the credibility of our policies and hurting our long-term ability to finance investment and sustain growth. And soaring debt will force up real interest rates, reducing capital and productivity and boosting debt service. Not only will those factors steadily lower our standard of living, but they will imperil economic and financial stability.
Familiar challenges. Sound familiar? Warning about these challenges has long been a staple for economists. Five years ago, for example, I summarized my concerns about our coming fiscal problems, along with the interplay among them and unexpected longevity, inadequate thrift and saving infrastructure, mediocre education outcomes, and inadequate energy policy (see America’s Long-Term Challenges, May 21 and May 24, 2004). I was merely the latest in a long line of alarmists; for example, Pete Peterson famously noted more than 20 years ago that “America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon. And now the day of reckoning is at hand” (see “The Morning After,” Atlantic Monthly, October 1987). The Congressional Budget Office (CBO) has since 1997 – under directors from both sides of the aisle – carefully laid out ever-more depressing fiscal scenarios in its annual Long Term Budget Outlook, the latest of which appeared last week.
The problem, ironically, is that the day of reckoning hasn’t come. This has seriously undermined doomsayers’ credibility and, more importantly, it has made the electorate and elected officials complacent about the threat from unsustainable fiscal policies. Some even proclaimed that “deficits don’t matter.”
To be fair to politicians, voters obviously don’t want prudence. We want tax cuts, and if we’re asked what spending we want to see cut, we usually only come up with minor budget line items. Very few (other than the more ideological minded) seem to have much appetite for lower spending on defence, education and supporting the elderly.
What’s particularly wild is that even when the crisis is right in front of us, we can’t do anything. Or at least, they couldn’t do anything in California. Rather than address their fiscal crisis — one in which they were clearly given a drop-dead date — the state chose to convert into a third-world country that issues its own currency, but borrows in dollars.
That’s some political self-destruction for you.
What will stop us from doing the same?
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