The maths of America’s financial problems are fairly simple. Every year the federal government spends more than it brings in so must borrow to fill the gap. This is fine when you’re young and healthy, with great prospects and you are borrowing to invest. But one day your lenders look at you and realise you’re not young and growing any more. You’re middle-aged and knackered. You are borrowing simply to spend and time is running out for you to pay back your debts. It’s an ugly moment for anyone, especially the most powerful country in the world.
There are economists like Paul Krugman who argue that America is not like a household or a person. It can borrow and invest in ways unique to sovereign powers. Countries do not simply age and die. They are capable of constant renewal through investment in education and infrastructure, funded by low-interest debt. So when bad times hit, you don’t cut, you borrow more to improve and expand.
And then there are those like Niall Ferguson, the Harvard University Professor of Doom and Gloom, who takes a more tight-fisted view. He has been warning of the imminent debt explosion for several years now. If it weren’t for the Federal Reserve printing money to buy hundreds of billions of dollars in US Treasuries through its quantitative easing program, interest rates would already be through the roof. The United States would be groveling to its Chinese and Japanese debt masters for an extension on its loan payments.
Watching the government shutdown, Prof. Ferguson has written, we are like an audience smelling smoke in a theater, too busy enjoying the show to worry that the building is on fire.
I’m not sure it’s such an entertaining show. Watching politicians and bureaucrats worry about not paying their bills is hardly Fast & Furious 6. Each installment consists of Democrats saying ‘we’re not negotiating’, and Republicans saying ‘us neither’. Standing between these two gangs of raspberry blowers you find yourself covered in spit.
The result is the poor Treasury Secretary, Jacob Lew, staring at his bills like some beleaguered parent wondering which to pay now and which to pay later. The $12 billion Social Security payment on October 23rd or the $6 billion interest payment on October 31st? The $18 billion in Medicare on November 1st or the $25 billion on Social Security due the same day? A higher debt ceiling, or overdraft as mere mortals might call it, sure would help.
But in the meantime, life goes on. A few National Parks are closed. Some workers have been put on temporary leave, with the assurance that they will be paid throughout it. The IRS is still demanding that taxes be paid on time but will be delaying paying refunds. Government mostly as usual. Everyone knows this is nothing more than a haggle which will eventually, and exhaustingly, be resolved, just as the fiscal cliff crisis was resolved in January, with just hours to go. Remember the fiscal cliff? The world needs the United States and despite everything remains willing to lend to it.
The crisis junkies on both sides, though, are an obstreperous bunch. Prof. Ferguson wrote in the Wall Street Journal this weekend that ‘only a fantasist can seriously believe “this is not a crisis”‘. He then went on to cite debt forecasts from the Congressional Budget Office stretching out to 2026, 2049, 2072 and even 2088, by which time ‘interest payments would – absent any changes in current policy – absorb just under half of all tax revenues.’ By 2088, though, all the Baby Boomers who are responsible for so much of the recent surge in social security and health care spending, will likely be dead. It also made me wonder how many economic forecasts made in 1938 turned out to be true today. Prof. Ferguson groaned that the CBO’s dismal report was ‘almost entirely ignored by the media’. That may be because it didn’t ring true.
It’s easy to get lost in the thickets of the shutdown, to be dazzled by talk of continuing resolutions to fund government and the debate over whether or not the President can raise the debt ceiling under Section 4 of the 14th amendment. (No, seems to be the consensus).
You can even view it solely as throat-clearing for the 2016 presidential election. Senator Ted Cruz of Texas, a brilliant rogue, has used the past few weeks to make a national spectacle of himself, establishing himself as the champion of the Republican right. Hillary Clinton has remained off-stage but must be cheering every time Republicans are tarred with responsibility for the shutdown as it boosts her chance of winning the White House.
On an individual level, you can see the strains. The Speaker of the House, John Boehner, looks like he wants to toss out his Camel Ultra Lights and go back to smoking real cigarettes. The President seems disgruntled and morose. He knows that great Democratic Party wranglers like Lyndon Johnson would never have put up with this, but doesn’t seem motivated to fix it. Harry Reid, the Senate Majority Leader, scuttles around the Capitol with all the charm of an angry ferret.
Then there are the jubilant Republican rebels – think Bill Cash in cowboy boots. Ted Yoho of Gainseville, Florida, compared their cause to that of Lech Walesa and Martin Luther King. Dave Schewikert of Fountain Hills, Arizona, said of the process ‘it’s supposed to be cantankerous it’s supposed to be this constant grinding’, just the kind of uplifting language to draw young people in politics.
But at the root of it all is the role of government in paying for the old, the sick and the poor. That is what entitlement programs, which are the fastest growing and largest slice of federal spending, are all about. It is what Obamacare, the President’s health care law, is about, and which Republicans want to reverse. The Republican obstructionists say America cannot keep borrowing to pay for promises we cannot afford to keep. Democrats disagree.
The short-term politics of the shutdown will quickly be forgotten. Canny speculators will doubtless profit from the short-term volatility stoked by the likes of Professor Ferguson. But this issue of how to pay for the old, the sick and the poor is not going away. Democrats may say the Republicans are causing havoc by tying Obamacare, which has already passed through the legislative process, to funding the entire government. But that’s a nicety. On an issue as big as this, it makes sense to discuss what’s in the budget at the same time you’re discussing how to fund it. It would be irresponsible not to.Tags: Economics, Economy, Niall Ferguson, US politics, White House