- - Tuesday, November 13, 2012


The Budget Control Act of 2011 requires the president and Congress to come up with a nine-year, $1.2 trillion deficit-reduction plan by Jan. 1, or annual defense and non-entitlement programs will be cut automatically by $109 billion.

Simultaneously, the George W. Bush tax cuts — a 2 percentage-point payroll-tax reduction, extended unemployment benefits and other assorted programs — will expire. Without new legislation, taxes will be increased and spending cut by more than $600 billion. A sudden and massive drop in private and government spending surely would tank the economy and send the unemployment rate into the teens.

All confidence would be lost in Washington’s ability to manage its finances, bondholders would abandon U.S. Treasury-issued bonds, the Federal Reserve would be compelled to print money to finance the government and avert default, and U.S. businesses would flee to more promising and better-managed venues in Asia.

A second Great Depression would grip the nation.

To avert calamity, President Obama and House Republicans likely will compromise to raise taxes on high-income Americans by $100 billion to $150 billion, curb spending an equal amount and renew the Bush tax cuts for families earning less than $250,000.

This will hardly be enough to right the nation’s shaky finances, yet slicing the budget deficit by as little as $200 billion or $300 billion still would throw the economy, barely growing at 2 percent, into a tailspin.

Simply put, Americans and their economy have become addicted to huge federal deficits.

During Mr. Bush’s first four years, the trade deficit doubled and ultimately pierced $800 billion, owing to lost competitiveness with China and rising oil prices. A recession should have resulted from this lost demand for U.S.-made goods and services.

Instead, Beijing and oil exporters stepped up purchases of mortgage-backed bonds and other U.S. securities. Aided by creative lending by our nation’s banks, Americans spent more than they earned and sustained the boom into 2007. When borrowers ultimately defaulted, the bubble burst, and the nation was thrust into financial chaos.

A huge trade gap continues, but the federal government is doing the borrowing and spending to keep the economy going.

The annual budget gap has averaged $1.3 trillion over the past four years — up from $161 billion in 2007, the year before the financial collapse. Spending is up $1 trillion — outlays for Social Security, Medicare and other entitlements have increased by more than both the entire 2013 budget for the Department of Defense and appropriations for other civilian outlays.

By 2020, runaway entitlement spending will require completely shutting down the military or crippling domestic spending programs and imposing massive new taxes on the middle class.

With Americans living longer, the solution is to raise the Social Security retirement age to 70 and pattern U.S. health care after other national systems that better contain costs. For example, the Germans and the Dutch spend one-third less on health care by more aggressively regulating prices, rationing care and spending much less on lawsuits.

Democrats would have to disappoint organized labor to push up the retirement age and disappoint tort lawyers to limit malpractice and class-action suits. Neither Mr. Obama nor congressional Republicans are inclined toward a mature discussion about prices and rationing in health care.

Mr. Obama and House Republicans indicate no interest in confronting Chinese mercantilism to accomplish more balanced trade with the Middle Kingdom. The president refuses to recognize that a bounty of natural gas, solar panels and windmills is not enough to accomplish energy independence. More drilling for oil in the Gulf of Mexico, off the Atlantic and Pacific coasts and in Alaska is needed, too.

Yet, without better trade and energy policies to boost growth, significantly cutting the budget deficit will instigate another recession. Absent radical reforms in entitlement spending, Washington is headed for financial collapse by the end of the decade.

Peter Morici is an economist and professor at the Smith School of Business at the University of Maryland.

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