There was a good piece (subscription required) in the November/December issue of Foreign Affairs. It was written by the President of The Council on Foreign Relations, Richard Haass, and the Chairman and CE0 of Evercore Partners, Roger Altman. Mr. Altman was recently passed over for the job of being President Obama’s chief economic policy advisor. One wishes, after reading this piece, that he had not been.
Entitled “American Profligacy and American Power,” the piece makes the obvious point that if American profligacy is not reversed, American power will decline. Federal debt has essentially tripled in the last decade, from 35% of GDP in 2000 to 62% of GDP in 2010. The authors note that the Congressional Budget Office now projects that Federal debt will reach 90 per cent of GDP by 2020.
These debt figures do not include the costs of nationalizing Fannie Mae and Freddie Mac or the staggering debt loads and unfunded liabilities of state and municipal governments, or the unfunded and underfunded liabilities of the Federal government (Medicare and Social Security). Throw those into the mix, season with elementary demographics (baby boomers shuffling into retirement and Medicare coverage) and you fully understand why Mssrs. Haass and Altman write that “the post-2020 fiscal outlook is downright apocalyptic.”
Two things can happen. One is that the political elites in Washington and around the country suddenly grasp the peril of our current and pending predicament and put together a proactive plan that addresses, or begins to address, the crisis. The minimum number to achieve that goal is $300 billion per year over 10 years. That keeps the wolves from the door. That number will not come from budget cuts alone. An energy tax and some kind of value-added-tax will almost certainly have to be part of the mix.
Being veteran Washington hands, the authors see little prospect of anything like this happening, unless President Obama makes it his mission to make it happen, for the remainder of this term and all of his second term (should he be re-elected). Only the president can bridge the partisan divide. Only the president can coax the nation toward austerity.
Absent that kind of leadership, global capital markets will administer the cure for American profligacy. The medicine will be nasty (sky-high interest rates, the collapse of the dollar, a 20-five per cent decline in living standards, at least) for most Americans. The consequent political upheaval might spiral out of control into social unrest and disorder.
The cost of profligacy is diminished power. Everyone in the world knows this. Everyone in the world now waits to hear what President Obama is going to do to preserve American power. Which is why tonight’s State of the Union Address is important to US national security interests and to its foreign policy. If US allies and adversaries decide that US profligacy will continue unchecked, they will re-calculate their alliances amd act accordingly.
The world will tilt eastward. The world will become less stable. And the wolves will be that much closer to our doors.
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