A Bankrupt Political Class Is Bankrupting The United States
For the government of the United States of America, the status quo is not sustainable. About that, there can be no debate.
The latest Congressional Budget Office projections see federal debt hitting 90 per cent of Gross Domestic Product within 10 years. That’s approaching triple the long-term historical average. But many observers actually think the CBO is too optimistic. An International Monetary Fund paper concluded American debt could be the same size as the economy by 2015.
After that, things will only get worse. A financial crisis that sinks the American dollar and forces the U.S. government to impose the sort of severe austerity measures familiar to third-world defaulters will become increasingly likely.
But projections like these are often self-negating. People see them. They get scared. They act. And in acting, they change the future. Disaster is averted. Will that happen now?
We’ll only know when time passes. But to get a sense of how things might go, it helps to recall how the U.S. got into this mess. In the late 1990s, years of budgetary restraint in the mid-1990s combined with tax increases and a flourishing economy to produce a string of huge surpluses — and forecasts of more far off into the future.
What to do with all that money? Campaigning for the presidency in 2000, George W. Bush had the answer. Tax cuts and spending increases. Bush’s two massive tax cuts reduced federal revenue by more than $2 trillion over 10 years. At the same time, spending grew two-and-halftimes faster than it did during the 1990s. Inevitably, this cost far more than the available surpluses and so the U.S. plunged back into deficit. In the 10 years between 1998 and 2008, the U.S. government went from a surplus equal to one per cent of GDP to a deficit equivalent to 3.2 per cent of GDP. “The eight years of the Bush administration saw the largest fiscal erosion in American history,” writes Roger Altman and Richard Haas in the latest edition of Foreign Affairs.
The Bush administration wasn’t concerned, however. “Reagan proved deficits don’t matter,” Dick Cheney famously growled. But deficits do matter. When the crash of 2008 hit, revenues plunged. Add Barack Obama’s stimulus spending to the bill and you get the current dire situation. So how can the U.S. climb out of this hole?
Go back through the list in reverse order. Stimulus? It’s done. Whether for good or ill, there will be no more big stimulus packages.
Revenues lost to a plunging economy? They will revive when — if — the economy revives. The spending splurge of the last decade? Untouchable. From Obamacare to Bush’s prescription-drug benefit, the expensive items are ringed with barbed wire and defended by heavily armed interest groups.
There’s a reason why Republicans who talk tough on the deficit refuse to discuss specific cuts. The Pentagon is the prime example. Its annual budget is up 50 per cent in the last 12 years to well over $600 billion. Add in the cost of Iraq and Afghanistan and it’s $720 billion. The U.S. is responsible for almost half the military spending in the world — add America’s NATO allies and it’s almost 70 per cent — and yet the latest reports indicate Obama is planning to stay longer in Iraq and Afghanistan and there’s been almost no discussion of serious cuts to the military. The politics are too vexed. The vested interests too powerful.
So it’s on to the final item on the list: the Bush tax cuts. Thanks to an accounting scheme designed to hide the real costs of the cuts, they’re scheduled to lapse. Making them permanent would cost the treasury $4 trillion over the next decade. Given that the cuts were made when the government was swimming in money, and given that the U.S. is now on course for bankruptcy, letting them lapse seems the only sane thing to do. After all, that would only mean returning tax rates to where they were in 2000. And 2000 was a pretty good year.
But that’s not going to happen. Obama and the Democrats want to make the cuts permanent for everyone but the rich. Cost: $3.2 trillion over 10 years. The Republicans insist that the cuts for the rich must be permanent, too. Cost: $700 billion. And so, at a time when the U.S. government lives at the mercy of Chinese bankers, the Democrats and Republicans are vigorously debating whether they should max out the last credit card or whether they should max out the credit card plus take out a fourth mortgage.
The inability of the political class to get serious led to a proposal for a bipartisan Congressional committee on fixing American finances. It flopped. Democrats and Republicans couldn’t agree on how the committee would work.
So Obama created a bipartisan committee by executive order and on Wednesday its co-chairmen presented a set of proposals to the committee. They included some smart and courageous spending cuts — notably to mortgage-interest deductibility — but they also called for another massive round of tax cuts. That’s right, cuts.
The top income tax bracket would fall from 35 to 23 per cent, so America’s millionaires and billionaires would get a lot richer while America goes bankrupt. Anyway, it’s irrelevant. Few expect the cochairs to get the agreement of 14 of the 18 commissioners, as required to send the proposal to Congress.
And if it does go to Congress? Anyone expecting a serious and sober discussion of fiscal realities is delusional. Altman and Haas conclude that the American political system simply isn’t up to the challenge. Only when the crisis strikes will the necessary changes be made — which will make them far more wrenching and painful.
“That is the American tragedy of the early 21st century,” James Fallows wrote in the Atlantic Monthly. The United States has “a vital and self-renewing culture that attracts the world’s talent, and a governing system that increasingly looks like a joke.”