Yesterday (Feb 1) the NYT ran a news analysis piece called “A Decade Of Enormous Deficits May Alter American Politics And Power” by Jonathan Ernst of Reuters. As I read the piece, I found myself talking back to the points put forth in the article. Below, I try to reproduce my imaginary conversation about the decent of our nation.
WASHINGTON — In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.
The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.
Could it be that our nation has been engaged in a protracted but hidden civil war, that began during the Reagan era? Has a deficit, by other names, been steadily increasing as national wealth has become increasingly concentrated and enterprises that create real value in product and service, have steadily declined? Has the concentration of wealth on “Wall Street” and among corporate hierarchies done nothing more than mask real net losses in the broader “main street” economy?
But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.
Like hopelessly indebted homeowners faced with foreclosure by their creditors, are we living on borrowed time? Who will bail out our nation?
For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.
There may be some parallel with what ailed Japan, but their experience would be a mere hint of our disease. Was the Japan of the past decade a world superpower, with empire, armies, and a nuclear arsenal bound up in its affairs? Japan’s bust was accompanied by little popping sound. The collapse of our national influence and ability to assert our will, will result in a booming roar that will shake the foundations of international stability, such as they are.
Or, as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”
What about events on route? The world’s biggest power, backed into a corner, confused, polarized, filled with fear and loathing, ready to do whatever it takes, however dangerous.
The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade.
Mr. Obama himself hinted at his own concern when he announced in early December that he planned to send 30,000 American troops to Afghanistan, but insisted that the United States could not afford to stay for long.
During WWII time was our ally. From an economic standpoint, the Axis powers could not sustain an indefinitely protracted fight.
“Our prosperity provides a foundation for our power,” he told cadets at West Point. “It pays for our military. It underwrites our diplomacy. It taps the potential of our people, and allows investment in new industry.”
And then he explained why even a “war of necessity,” as he called Afghanistan last summer, could not last for long.
“That’s why our troop commitment in Afghanistan cannot be open-ended,” he said then, “because the nation that I’m most interested in building is our own.”
Mr. Obama’s budget deserves credit for its candor. It does not sugarcoat, at least excessively, the potential magnitude of the problem. President George W. Bush kept claiming, until near the end of his presidency, that he would leave office with a balanced budget. He never got close; in fact, the deficits soared in his last years.
Bush was right on the straight-line track. Deficits soared and the rich got richer. It’s like the story “Around the World in 80 Days”. On the last leg across the Atlantic, Phileas Fogg ordered his crew to burn the ship to fuel the engine. He won his bet, but lost the ship.
Mr. Obama has published the 10-year numbers in part, it seems, to make the point that the political gridlock of the past few years, in which most Republicans refuse to talk about tax increases and Democrats refuse to talk about cutting entitlement programs, is unsustainable. His prescription is that the problem has to be made worse, with intense deficit spending to lower the unemployment rate, before the deficits can come down.
One of the first lessons in sailing is that the rhumb-line (a straight line between two points) is rarely the fastest way to get from here to there. Will spending more in the short run shape a course to recovery in the long run? No guarantees, but we already know what the rhumb-line course will produce—exactly what we have.
Mr. Summers, in an interview on Monday afternoon, said, “The budget recognizes the imperatives of job creation and growth in the short run, and takes significant measures to increase confidence in the medium term.”
He was referring to the freeze on domestic, non-national-security-related spending, the troubled effort to cut health care costs, and the decision to let expire Bush-era tax cuts for corporations and families earning more than $250,000.
A drop in the bucket, considering the problem, but right minded.
But Mr. Summers said that “through the budget and fiscal commission, the president has sought to provide maximum room for making further adjustments as necessary before any kind of crisis arrives.”
Assuming that we can see the next crisis coming, which is highly unlikely.
Turning that thought into political action, however, has proved harder and harder for the Washington establishment. Republicans stayed largely silent about the debt during the Bush years. Democrats have described it as a necessary evil during the economic crisis that defined Mr. Obama’s first year. Interest in a long-term solution seems limited. Or, as Isabel V. Sawhill of the Brookings Institution put it Monday on MSNBC, “The problem here is not honesty, but political will.”
No, dishonesty has played a very big role in all of this and “political will” has been one of the causalities.
One source of that absence of will is that the political warnings are contradicted by the market signals. The Treasury has borrowed money to finance the government’s deficits at remarkably low rates, the strongest indicator that the markets believe they will be paid back on time and in full.
There’s some upside down thinking for you! In the crisis produced by speculative money churning rats, money has flowed to safety and the biggest lifeboat in this storm has been the national Treasury. No matter what the rate, the best lifeboat remaining is the national treasury that floats on the backs of millions of poor and getting poorer, taxpayers. As the current storm abates, the rats are already making feeding forays, but they are still staying plenty close to the lifeboat.
The absence of political will is also facilitated by the fact that, as Prof. James K. Galbraith of the University of Texas puts it, “Forecasts 10 years out have no credibility.”
He’s got that right. At the beginning of the last century no one could have predicted the depth and scope of WWI, The Great Depression, WWII, the Holocaust, Vietnam, Disco music, and Greed is Good.
He is right. In the early years of the Clinton administration, government projections indicated huge deficits — over the “sustainable” level of 3 percent — by 2000. But by then, Mr. Clinton was running a modest surplus of about $200 billion, a point Mr. Obama made Monday as he tried anew to remind the country that the moment was squandered when “the previous administration and previous Congresses created an expensive new drug program, passed massive tax cuts for the wealthy, and funded two wars without paying for any of it.”
But with this budget, Mr. Obama now owns this deficit. And as Mr. Galbraith pointed out, it is possible that the gloomy projections for 2020 are equally flawed.
Simply projecting that health care costs will rise unabated is dangerous business.
“Much may depend on whether we put in place the financial reforms that can rebuild a functional financial system,” Mr. Galbraith said, to finance growth in the private sector — the kind of growth that ultimately saved Mr. Clinton from his own deficit projections.
Do we want the conditions for growth that prevailed under Clinton? Seems I remember that the DotCom boom was built on speculative investment in companies that produced nothing and that real wages for most people steadily declined. Wasn’t the phenomenal growth of the 90′s built on the rush to deregulate that produced the phenomenal real estate bubble that set the stage for the crisis we face today?
His greatest hope, Mr. Galbraith said, was Stein’s law, named for Herbert Stein, chairman of the Council of Economic Advisers under Presidents Richard M. Nixon and Gerald R. Ford.
Stein’s law has been recited in many different versions. But all have a common theme: If a trend cannot continue, it will stop.
Good! A bit of not-so-clever nonsense to wrap things up.
