It’s absurd. Uncle Sam is likely to run up an additional $11 trillion in debt over the next decade. But Washington only replies with minor budgetary tweaks. First, the Obama administration says it wants to freeze some domestic spending for three years. Then it creates a new healthcare entitlement program “paid for” through tax increases and unlikely spending cuts. Next up, the Obama administration creates a deficit reduction panel that not even its members think will work. And now the Obama administration wants new “rescission” authority to cut billions from congressional spending bills — excepts it’s “trillions” that are the problem. None of these measures favorably alters the budget’s perilous trajectory.
Little wonder that many observers think Washington will do nothing substantial about the exploding debt problem without some sort of financial market crisis. It is the bond market vigilantes that will come to the rescue and enforce fiscal discipline. Here is one scenario devised by the Committee for a Responsible Federal Budget:
Under this scenario, at some point financial markets or foreign lenders decide we are no longer a good credit risk, possibly due to debt affordability concerns. They conclude the United States cannot escape basic economic and financial “laws of gravity” forever. They stop buying our debt securities or demand dramatically higher interest rates due to increased perceived risk. With the sudden shift and large rise in interest rates, the economy goes into a severe recession. … Unlike the past two years, we cannot, however, borrow to stimulate the economy because the crisis was caused by excessive debt and lost confidence. … Creditors concerned with hyperinflation or even default will not buy U.S. debt.
Presumably, that would be the moment when Democrats unveil their “emergency fiscal plan” to calm markets through a massive value-added tax. It would be TARP all over again. But the costs would be many magnitudes higher. But I think the conventional political wisdom is deeply flawed. First, Americans intuitively understand that there is something deeply wrong about running trillion-dollar budget deficits as far as the eye can see. Maybe deficits didn’t politically matter in the 1980s, but debt as a share of GDP was only 50 percent. Now it is 60 percent only its way to 100 percent in a decade.
This is why we didn’t see a second trillion-dollar stimulus. Although plenty of liberal economists though it was needed, even congressional Democrats understood that Stimulus 2.0 would not fly with voters freaked by all the red ink.
Second, America doesn’t need a domestic debt crisis. Voters can easily track the one happening with Greece and the EU. Runaway spending. Overpaid civil servants. A loss of confidence. Trillion-dollar bailouts. Falling standards of living. National decline.
That all adds up to a pretty compelling case for action in America. And Republicans (along with fiscally responsible Democrats) who want to see true spending reform — of the sort outlined in Rep. Paul Ryan’s Roadmap for America — would do well to frequently mention Greece on the campaign trail. Kind of a “don’t let this happen to us” sort of thing. They should also note that lower spending plus smart tax cuts to boost growth are the best recipe for restoring fiscal order — not massive tax increases which politicians will only divert to more spending.