I provoked a tirade of abuse from Crikey readers in the past fortnight when I suggested it would be preferable that the $14.3 trillion United States debt ceiling not be raised. Apparently I hate debt, am a Republican partisan, a “gormless git”, and an “ignoramus”. And I should never quote writers such as Adam Smith or Henry Hazlitt, however relevant and timeless their insights.
I don’t renounce my view, which is even more apt now: absent a wise politician of great perseverance and popularity, only a genuine crisis can wrench the US from sliding into bankruptcy or enduring rampant inflation.
Without a hard-debt ceiling, the path of least resistance — ever greater debt — is too enticing. It will never be the “right time” to withdraw stimulus or to cut spending. Just look at Europe. For all President Clinton’s admirable surpluses in the late 1990s, America’s central government debt in 1999 was barely lower than it was in 1989, according to the OECD.
As real incomes have grown, the welfare state — social and corporate — has exploded. America will soon have World War II debt levels, rendering it incapable of countering any serious military threat without economic chaos.
By failing to grasp the nettle, the United States Congress has swapped a crisis yesterday for a far bigger crisis tomorrow. No wonder markets have tanked worldwide and the US has lost its AAA credit rating. And gold, which cannot be “quantitatively eased”, has surged past $1700 an ounce, and looks set to surpass its inflation-adjusted peak of the early 1980s.
The non-partisan Congressional Budget Office conservatively measures the US debt in 2011 at 69% of GDP (already above the level at which most sovereign defaults have occurred). This year’s budget deficit is $1.4 trillion (bigger than the entire Australian economy), and cumulative deficits from 2012 to 2021 are expected to be $9.5 trillion. By 2021, the CBO reckons US debt to GDP will be more than 100%, about Italy’s level today.
The vaunted $2.1 trillion spending cuts agreed as part of the Congress’s “resolution” are a joke. They are cumulative over 10 years, and $1.2 trillion of them are not even specified. The Afghanistan and Iraq wars and social welfare programs are exempt, casting doubt even on the timid aspiration.
President Obama’s $787 billion “stimulus”, which greatly exacerbated the debt crisis, deserves special censure. The Keynesian economic geniuses who designed it, Jared Bernstein and Christina Romer, said in early 2009 US unemployment by now would be below 7% with the plan, and 8.2% without it. US unemployment is now 9.1%! Clearly, the models and theory are not crap; the stimulus simply wasn’t big enough.
President Bush’s and Obama’s foreign wars might be defensible, but perpetuating bankrupt, repugnant business models with taxpayers’ money, underwriting rampant “stimulus” spending, and creating money out of thin air were always bad economics and insult the intent of the US constitution to boot. As Frederic Bastiat observed in 1848: “the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”
The idea that Congress should simply enact “a sensible program of tax increases and spending cuts” as my critics recommend, is naive and unhelpful. It ignores the incentives of US politicians (especially before the 2012 presidential election) and the history of the 20th century — one of ever larger government with debt trending up since 1970. Only a genuine crisis, prompted for example by a debt ceiling, can bring about the paradigm shift public finance in America needs.
But all is not lost. Alan Greenspan said yesterday that “the United States can pay any debt it has because we can always print money … so there is zero probability of default.” The French 1st Republic was punctilious about debt repayment too, ensuring all creditors received valuable assignats.
Another detractor accused me of being “morally opposed” to debt. I am not; but frankly a bit more morality and bit less Keynesian economics wouldn’t go astray.
interesting enough argument, let down by the whiny beginning. you got some mean comments. gosh. suck it up and move on, toryboy. Jeezis.
where are you from adam ? the centre for independent studies ?
or the centre for RIGHT WING interpendent studies ?
how come all right wing commentators like yourself are always right ? pardon the pun
these crisis have been founded in the greed is good, markets know best that commentaors like you subscribe too
Hmm, still find that ‘R’ word repellant, don’t you, Adam? However, the solution, as bernard Keane and Glenn Dyer have appropriately described it above you in Crikey today, is ‘Revenue’. The USA is now Revenue Anaemic, and it’s Market Fundamentalist Hayekians such as yourself, who are the cause of that nation’s problems, not the solution.
Just explain to us next time, because it appears that Crikey can’t get enough of your controversial Right Wing polemic, how it is that the richest citizens in America can be handed on a plate $2 Trillion dollars in Tax Cuts by the Neo Con(with the emphasis on ‘Con’) President, George W.Bush, with all the faith in Reaganesque ‘Trickle Down Economics’ and the job creation furphy at it’s heart, and yet, as you sneeringly point out in your anti-Keynesian diatribinous vomit upon the Crikey page today, Unemployment in the US is still at 9.1%?
While you’re at it, explain to us how the only country in the world not controlled by a Conservative shill for the Mercantilists and Kleptocrats, that is, Australia, who applied Keynesian principles to it’s response to the GFC, is now the only country to be sitting pretty as the world faces another downturn brought on by bailing out the bastards who got us into this economic mess in the first place and not putting that money into keeping the economy of their own country functioning until it gained natural momentum again?
Instead of answers, what I imagine you will give us next time is more of the same sneering condescenscion directed at commenters such as I, and ‘Poor Me’ wailing about the justified vitriol that your first piece received from those of us who aren’t buying your CIS Bill of Goods. Because. It’s. A. Crock. Of. Self-Serving. Rubbish.
The US stimulus was composed of approximate 1/3 tax cuts which have no stimulatory effect. So Creighton doesn’t get to count that as stimulus proper. The amounts dedicated to real stimulatory policies were minor as a proportion of the US economy, and the stimulatory effect is even smaller still when you count the net contraction of state government fiscal policies which counter-acted the federal policies. When you put all that together, there was very little genuine stimulus.
So Creighton’s attempt to mock the Keynesian is asinine and revealing. Krugman, DeLong, Thoma et al have been saying the stimulus was too small and too counter-balanced by state austerity since the beginning and they’re obviously been proven right.
What’s the alternative? Inflation therapy to de-leverage? I don’t believe that works. Creighton clearly believes in the magical austerity fairies and bond vigilantes, which as far as I can tell have failed to eventuated despite repeated ponderous predictions by Niall Fergusonet al. That view is based on little more than an emotional desire to reward the supply sider’s view of good behaviour.
Of course, if you tweak out the long run expectations of tax increases with whatever made up moral panic you’ve copied from the WSJ editorial page, you can invent any obstacle to intervention you want about the debt situation. The rest of us are based in the reality based community where you actually acknowledge that the US issues it’s own currency, and holds debt in its own currency. In that world, there is no meaningful short-run implications for the current debt levels or trillions of dollar more.
There is a real long-run fiscal problem tied to reality of an aging population, a dysfunctional Congress system with the inability to contemplate new revenue, and rising social security costs. However, the medium term fiscal position is not that relevant, and the long-run solvency is actually hurt by withdrawing from the economy and not restoring tax rates on the rich to Clinton era levels.