In the midst of a season that has provided riveting political theater the budget extension impasse and the impending battle over raising the debt ceiling a bright ideological line has emerged between the two major political parties. It is not about whether we must reduce our debt (both sides ostensibly agree that we must), but about where those cuts should come from.
But let’s be clear: Without a serious challenge by congressional Republicans, the seriousness of America’s debt situation would not occupy its rightful place at the forefront of the political debate.
Let’s face it. The U.S. government is bankrupt. Its liabilities exceed its revenues by more than 200 percent by some estimates. If it were not for America’s status as a reserve currency a status earned by the nation’s long history of political stability and economic growth we would find ourselves in the same position as Greece and Portugal.
Those countries are not only unable to repay the principle amount they borrowed, but also have trouble meeting the minimum debt service payments without additional borrowing. In what appears to be an inexorable death spiral borrowing costs rising, while revenues are falling it appears those countries are going into default.
While the European Central Bank (ECB) has tried to bolster Europe’s failing economies with lending of last resort, it has thus far failed to stem the tide of economic logic: At a certain level, when you owe more than you make, your creditors get skittish and demand higher interest rates to compensate for the risk of default. Creditors in Europe fought their version of the Fed, and, contrary to popular wisdom in the U.S., they appear to be winning, putting the people of those countries at their mercy.
In sum, the people of Greece and Portugal have become serfs in their own country. The land they live on and the houses they live in do not belong to them anymore. Moreover, their political system is being increasingly controlled, not by their elected leaders, but by unelected supers-sovereigns such as the International Monetary Fund and ECB.
America has been spared the problem thus far. Mostly, it seems, because Europe’s problems seemed much worse in the eyes of major creditors. But this cannot continue. The major holders of U.S. debt appear to be getting skittish. The threatened downgrade in America’s AAA rating by Standard & Poor’s last week is merely a shot across the bow signaling a much worse situation to come.
Meanwhile, Treasury Secretary Timothy F. Geithnerand other Obama administration officials seem to have shrugged off the potential political effects of foreign countries holding so much U.S. debt. They reason that U.S. investors could easily make up any slack from a threatened sell-off by China.
But it misses the point. Major U.S. investors, including Pacific Investment Management Co. Manager Bill Gross, have exited the U.S. debt market, citing the increasing riskiness of the assets on its books relative to the interest rate it pays to bond holders. They are not likely to return until interest rates rise. And, with total federal debt having ballooned to an astronomical $14 trillion, a rise in borrowing costs would have catastrophic effects on the government’s ability to meet its debt service obligations.
But what seems to get lost in the ideological debate is the fundamental truth. A country with declining national growth should not attempt to fill the gap with a rash of borrowing. At some point, using additional long-term borrowing to support short-term consumption whether its bank bailouts, stimulus spending or unemployment benefits constrains future growth. The Obama administration has attempted to phrase the borrowing as an “investment” in future growth.
But there is a real question as to whether the government is the best engine for investing in the growth America needs to get out of debt. The ideological line starts here. Would we rather have government “invest” our money for us, or is private enterprise the more appropriate conduit for achieving long term growth?
The U.S. government was not designed to be an investment vehicle. In fact, its design reflects an intention by the framers of the Constitution to specifically limit the autonomy and capacity of government, which they rightly viewed as a necessary evil. As a consequence, government is inherently wasteful and inefficient. And that’s fine, as long as it is small.
But the political games continue. Legitimate concerns about the amount of government debt and spending are often painted as a smoke screen for reducing our commitment to the poor and elderly. But the fact of the matter is that entitlement programs constitute a majority of current expenditures. If the cuts don’t start there, where will they be made?
It is high time that we clarify our priorities at this juncture, because the decisions we make now are likely to stay with us for the foreseeable future. No one would contest the fact that we have to reduce our debt to more manageable proportions. The perils of not doing so are obvious. The difficult challenge we must face is deciding our priorities. And this takes some careful consideration.