The Debt Crisis

 
Dana Milbank

"Greece's national debt last year reached 113 percent of gross domestic product. The United States will hit that in about 2020, according to the Government Accountability Office, assuming policy continues as it has. And last year's U.S. budget deficit amounted to 9.9 percent of GDP, nearly rivaling Greece's 12.7 percent.

To pull Greece back from the edge, Papandreou has promised to cut the deficit to 3 percent of GDP by 2012. For the U.S. government to make an equivalent cut, it would have to shut down the Pentagon and a few other agencies: the departments of Agriculture, Commerce, Education, Health and Human Services, Energy, Homeland Security, Housing and Urban Development, the Interior, Justice, Labor, State, Transportation, the Treasury, and Veterans Affairs, plus the Environmental Protection Agency and NASA -- and even then we'd come up a few dollars short. "  Milbank

-----------------------------------------------------------

That is my favorite picture of the columnist.  I do believe I have another of him as a jester.  I appreciate people who do not take themselves too seriously.

Well, there is nothing funny about his economic prophecy.  We have lived far too high on the hog.  We are in the process of going broke and the great majority seem oblivious.  The debt crisis is THE crisis.  Unless we relieve the financial burden of public debt, the United States is going to become a miserable place to live in about ten years.

All those people who are fretting over the erosion of constitutional rights in this country are going to have a lot more pressing things to obsess over.  Americans continue to live in a dreamworld in which they are entitled to the best of everything, security from violence, enough junk food to make them the fattest people in history and a Toyota in every driveway.   I suppose they would rather have a Ford now.

Let's sober up folks.  pl

http://www.washingtonpost.com/wp-dyn/content/article/2010/03/08/AR2010030803491.html?hpid=opinionsbox1

Comments

[Ronald]

Pat,

I found a recent Bruce Bartlett column to be quite informative on this issue. It is at http://www.forbes.com/2010/03/04/consumer-debt-deficit-budget-opinions-columnists-bruce-bartlett.html

He goes into a bit of detail and addresses some myths/misconceptions.

regards,

[Redhand]

I don't think the majority of Americans are "oblivious" to "the debt crisis." The painful recession most of us are enduring makes that an impossibility. Millions know they are "going broke" in stages.

If they seem apathetic, it's because most IMO believe they are powerless to alter things. Here, from my perspective we are more like Russia in the 1990s than I care to admit.

There is an unholy alliance between the economic oligarchs (think Wall Street) and the governing class (our useless Congress and the Administration under Rahm Emmanuel and Larry Summers -- and yes I am beginning to see Obama as a figurehead) that tolerates and even encourages the kind of economic scams that enrich both at the expense of the "majority." For me the housing bubble is a perfect analog to many of the Russian stock frauds and banking scams that wiped people out there in the 1990s; and as in Russia during that economic meltdown don't expect the Government to do a damn thing to help in any meaningful way (except to help Wall Street "preserve the system").

As for erosion of constitutional rights, I disagree about its relative importance. It's the one major distinguishing factor we have left, if we can keep it.

[DaveGood]

I think everyone should be aware of the history of this.

It took two hundred years plus for America's debt to grow to to 1 trillion dollars.....

It grew to five times that under Reagan and Bush 1.... dropped under Clinton.

It then doubled again under Bush 2.

It is a matter of historical record that under the "Business friendly" regimes run by Republicans in the last fifty years or so, not only has the national debt risen by a factor of ten...... the growth rates for the economy slowed each time.

DaveGood

[BillWade, Nh]

Congressman Ron Paul's plan for a "Freedom President":

http://www.lewrockwell.com/paul/paul647.html

[John Minnerath]

Yes, and in that time frame I'll be about 80 and people will want to listen to my opinions even less than now.
The big business lobby runs this country using our elected representatives as their pawns to enrich themselves and a narrow segment of the population.
Those people DO NOT care about anyone else or their long term effects.
Will we some day soon see a shift from politics as normal and see some constructive and effective changes made?
One can only hope I guess.

[Graeme]

Colonel,

The Greek analogy is inapt, as Greece is part of a currency union. If the American debt situation worsens, the currency can simply be devalued.

This would help the trade balance, by increasing the price of imports, and cutting the price of exports.

Given the amount of US dollars held by the Chinese, it's more likely they would be begging you in such a situation. If the dollar falls, their assets become much, much less valuable.

They've dug themselves into a hole with their policy of subsidising exports by keeping their currency low against the dollar (which requires buying dollars).

Dean Baker, an economist who was very prescient on the housing bubble, has more and similar things to say on Milbank's column:

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=03&year=2010&base_name=the_post_give_dana_milbank_an

America does need to eventually figure out how to pay for the things it was government to do (ie. raise taxes), or decide to forego some government services. But it's in a much better position than a country such as Greece.

Graeme

[lina]

Ross Perot made the federal debt the cornerstone of his presidential campaign in 1992. He got 19 percent of the popular vote. When the computer industry exploded in the middle of that decade, the federal coffers got filled back up, and by the time Clinton left office there was a federal surplus.

I realize the current debt is exponentially higher than '92, but why can't the same kind of economic upturn happen this time? Of course we also need financial system reforms that appear to be stalled in our pay-to-play Congress. But all the dire predictions about the federal debt sound just like Perot back in the post-Reagan years. There's nothing new under the sun.

[b]

All the discussions in the U.S. when public debt is in question is always about cutting this or that.

That is stupid. What might ruin the U.S. is the "tax cuts are good" mentality.

The U.S. should tax all personal income, which would include income from capital gains, above $1,000,000 at 50%.

Income between $500,000 and $1,000,000 at 40%. And further down at 30%, 15% and 0%.

That would pay off the debt pretty fast. Add a decent gas tax and that would even allow a real universal healthcare.

[Graeme]

I forgot to note that many countries have much higher debt loads than America does today, and seem to be doing alright. Japan's debt is significantly higher than that of the United States (200% of GDP), but it's not giving them any trouble at the moment.

[ex-PFC Chuck]

Unless and until the ideas that have informed American fiscal policies for the majority of the past thirty years are permanently relegated to the dustbin of history we are doomed. This situation is primarily, but not entirely, the responsibility of the movement conservatives who have dominated the Republican Party since the 1970s. The Democratic Party, which was the primary advocate of the Keynesian philosophy that underlay the enormous surge in our prosperity that occurred in the middle third of the 20th century, has been complicit mainly by not defending and promoting those core values effectively in the Reagan and Bush eras in which almost all of the damage has been done. Their politicians were otherwise too busy trying to hang on to their offices and didn’t call bullshit when Republican administrations proved unwilling to take the heat for cutting popular programs, military and domestic, to offset the wealth-redistributing, high-end tax cuts that were the core tenets of their new-found religio-economic faith. The one GOP president who did try to be responsible learned a hard lesson in November of 1992.

Keynesian economics teaches that if budgets average slightly in the black in good times, over the long haul economic growth will ensure that the national debt will diminish relative to the gross domestic product even if significant deficits are incurred during recessions to spur recoveries. It is this ratio that is the key indicator of fiscal health and risk, not the absolute amount of the debt. Just as the Republicans learned in 1992 that their base would not tolerate deviation from the true “Taxes Are Bad” faith, the lesson the rest of the political class has taken from the Bush 43 years is “Why should we try to be fiscally responsible when 1) the Republicans will beat us over the head during the next campaign for raising taxes and 2) when they win they’ll just resume raiding the treasury again and drive us back into deep deficit?” Someone once said that “Taxes are the price of civilization.” Unless and until this meme overpowers the “Taxes are inherently evil” meme the right has been pitching the past forty years we will continue sliding down the slippery slope of the disintegration of our civilization.

[wcw]

In a word, no.

In a chart, still no. Britain sustained higher debt levels for the bulk of the last three hundred years.

In a paragraph, we do consume too much, but primarily health care. Excluding health care, the consumption share of GDP is lower now than it was in 1960, and Eisenhower-era consumption levels were hardly unsustainable.

[Cato the Censor]

Maybe we could start to get a handle on the problem by giving up on the idea of endless Asian land wars (something that used to be a big military no-no) and scrap our ridiculously bloated military-industrial complex.

[Graeme]

The last point I'll make for now is that America faces many more problems more serious than debt. Financial regulation, peak oil, etc. And they in turn could actually cause debt to increase, even if you become more responsible with your finances.

The cases of Spain and Ireland are instructive. Before the financial crisis, both of them ran fairly respectable budget surpluses.

But their economies were not based on solid foundations. Overheated housing sectors, and other things. When their economies fell apart, their budgets went from surplus to deficit overnight.

In America, the deficit, and debt, are more likely to be symptoms, rather than the problem themselves.

Charts of budget surplus/deficit for Spain and Ireland:

http://bilbo.economicoutlook.net/blog/wp-content/uploads/2010/01/Spain_EMU_budget_deficit_1989_2008.jpg

http://www.finfacts.com/artman/uploads/2/Ireland_deficit_EU_Nov032008.jpg

[WILL]

"Let's sober up folks."
&
abandon the Zionist sauce that spills our blood & consumes our treasure?

No Way, Jose. It cracks me up how so many of those crackpot Teabaggers say they really like Ron Paul or Pat Buchanan EXCEPT for their Foreign Policy views.

They are holding up weak Tea Bags without caffeine. DeCaff. Teabaggers with their Nuts cut off. The Celeron versions.

[The Moar You Know]

I find it incredible that with Milbank's laundry list of agencies to be cut - cuts that he knows are politically infeasible or downright dangerous to the health and welfare of the nation - that he never mentions the inescapable and obvious, albeit politically humiliating (at least for the GOP) alternative that is actually going to end up being the only viable way out of our deficit mess; the raising of taxes, at least to the levels enjoyed under the patron saint of tax cutters, Ronald Reagan.

I find his outlook incredible. I do not find it surprising. Funny costumes aside, Milbank is a Villager through and through, and has subscribed wholeheartedly to the prevailing Norquistian wisdom that lowering taxes is always good, and that raising taxes, even in a time of crushing debt, is bad. A viewpoint shared by so many Americans that we never question the underlying assumptions behind it.

Until we cure this nation of the idea that paying for the services that we enjoy is evil, we will slide steadily downhill until Greece looks to us like America did to the Vietnamese refugees who came to my elementary school classroom 35 years ago - a place of impossible and incomprehensible wealth.

[mlaw230]

Mr. Milbank is a fear monger and to my knowledge has no particular background in economics. For example, there is no basis to project a straight line expansion of debt through 2020 as he does based on "current policy". Nobody is proposing that.

The public doesn't "get" Keynesian economics, so Obamanomics is going to be a hard sell, but there is a better explanation here:

http://www.ft.com/cms/s/0/7467f85e-1b30-11df-953f-00144feab49a.html?nclick_check=1

[walrus]

Col. Lang,

With respect, the demographics are much worse. China and India have growing middle classes that are going to dwarf America within Ten years.

America currently consumes 60% of the worlds natural resources to support 200 million people in a Western lifestyle. We are heading towards a war for natural resources.

The competition for resources is now intense. Our biggest companies here expect an 80% rise in iron ore prices this year, and Chinese attempts to buy up Australian mining and agriculture companies are becoming a serious threat to national security.

The price escalation of oil and natural resources has the capacity to cause America financial pain in a lot less than Ten years in my opinion.

[Adam L Silverman]

Sir,

I'll have something longer later, but I'd recommend the following:http://crookedtimber.org/2010/03/05/bookblogging-the-reanimation-of-trickle-down/

As well as most of the economics stuff at Professor Delong's Blog and Professor Krugman's Blog (for those that don't like the latter's politics, stick to his economics - he does a really good job making it accessible to non-economists).

[John Howley]

You are right to be concerned about how the public debt should be managed.

Don't overlook the massive private sector debt, from underwater mortgages to all the debt generated by "financial innovation." Much of this private debt is being hidden at the Fed or by loose accounting.

[Jackie]

Sir,
I seriously don't see how we can reduce the debt when one political party truly believes that reducing taxes is the answer to every problem. They may also believe in the Easter Bunny.

They need to quit signing Grover Norquist and the Club for Growth no tax pledges.

Personally, I've never minded paying taxes.

[Cieran]

Good topic, but Milbank is hardly the right source to gather intelligence from, and "debt" is too broad a brush to use to fill in the details of our economic woes.

First, the term "debt" includes both pointless wastes of money (e.g., neocon wars of choice) and worthwhile investments (e.g., maintaining roads to get us safely to work and back). Just as a citizen might incur debt to buy a house or to throw a party, a government might spend wisely or not, and so it's necessary to distinguish the utility of the debt before deciding if it's a good idea or a bad one.

The current deficit figure mentioned in this article is also enlarged by some more honest accounting, by putting the cost of our wars in the budget instead of hiding them off the books. It's not a coincidence that many of Bush's most important backers included folks from Enron, and so it should be no surprise that our budgetary accounting took on a decidedly Enron-esque costs-go-off-the-books nature during the last administration.

And finally, note how the term "debt" is juxtaposed by "deficit" in Milbank's article. We're seeing a lot of this particular confusion of late in the press, and either Milbank understands the difference (in which case he's not a very good financial journalist) or he doesn't (in which case he has no business offering his views).

Like all comparisons of stocks and flows in economics, these two concepts are related by integral calculus (though simple addition will take one a long way towards understanding). But the debt is the problem here: the deficit is its rate of growth. And to first order, the size of the current debt is not a by-product of Obama administration actions: it's a reflection of the warped priorities of nearly ten years of Bush administration decisions that revered (a) the utility of tax cuts for those who didn't need the money, over (b) the value of job creation investments for those who did.

I'm hardly a fan of President Obama, but at least he's done something to break that sense of malignant prioritization. He needs to do a whole lot more, but Milbank is hardly the person to remind us of this fact, since his jester outfit was deployed during an interview on MSNBC's Countdown, where he was talking about Dick Cheney's shotgun aiming skills, and not about the Bush administration's skewed financial priorities.

[N. M. Salamon]

Graeme:

that Japan has 200% of debt is not significant to the USA, for Japan has self-financed the debt, and Japan also holds almost $800 BILLION of USA treasuries and more of other currencies.

Tax raises will not ever get the USA out of hock, please observe the movie [30 min]:

http://www.iousathemovie.com/

With the data from Mr. Walker, the last Comptroller General of the USA, quit his post to EDUCATE USA CITIZENS on the fiscal mess the feds face without Afganistan surge.

As an aside, I read 100+ commentaries on the article, and it did not surprise me that so many were reflectoing some utopian dreams, rather than REALITY.

DOD and related will HAVE TO BE CUT GREATLY.

Rep Paul is right in many of his statements, but he errs in planning to defer to the Several States to run education. REALITY is against his proposition as results in comperative achievement in OECD lands ascertain.

Good luck

[Andy]

Well, Col. Lang, I'm with you on this one and have been for a while now.

I turn back to what the CBO director said earlier this year:

A large and persistent imbalance between federal spending and revenues is apparent in CBO’s projections for the next 10 years and will be exacerbated in coming decades by the aging of the population and the rising costs of health care. That imbalance stems from policy choices made over many years. As a result of those choices, U.S. fiscal policy is on an unsustainable path to an extent that cannot be solved by minor tinkering. The country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services. That fundamental disconnect will have to be addressed in some way if the nation is to avoid serious long-term damage to the economy and to the well-being of the population.

Those who believe that our budgetary problems can be solved through tax increases should consider that the costs of government services are increasing faster than GDP. There is no level of taxation, therefore, that is sustainable over the long term. Also consider that to cover today's government budget would require extraordinary levels of taxation - higher than many European countries - for a much lower level of services.

So-called conservatives, on the other hand, demand more tax cuts despite the fact that 40% of the population effectively pays little to no income tax and, as the Milbank and other articles make clear, spending cuts alone cannot work.

The point is the political establishment on both the right and left (and their tired narratives) cannot solve our fiscal problems. We need drastic entitlement reform as well as hard choices that will likely require significant reductions in government spending along with significant tax increases. In the current political environment such changes are unlikely anytime soon which means these problems won't be substantively addressed until we are at the edge or well past the point of crisis. Just look at the comments in this thread thus far - most ignore the problem entirely in favor of blaming the political opposition or engaging in ad hominem against Milbank. That doesn't bode well for the future.

[Graeme]

Saloman: That Japan's debt is self-financed doesn't change much. The main risk of having foreigners own your debt is when your debt is denominated in a foreign currency as well. Japan has debt denominated in Yen, and American debt is in US dollars. As a last resort, they can print more of it. For that reason, both countries are insulated from the worst type of debt crisis faced by countries such as Argentina, which had foreign denominated debt.

In Argentina, a currency devaluation had the effect of increasing their debt load. America or Japan do not face this problem.

That foreigners do hold US debt is largely due to the current account deficit, not the budget deficit. China is buying US bonds in order to fix its exchange rate. They could accomplish the same goal by buying US stocks and real estate instead. If they did that, then less US debt would be held by foreigners. But its not clear to me how that would change anything.

The salient question is whether or not the debt is denominated in the national currency. And the way to decrease liabilities owing to foreigners is to reduce the current account deficit.

As for Mr. Walker and IOUSA....you're not quite right about Mr. Walker's reasons for quitting. Or at least, educating the American people was not the only reason.

He left the office of the comptroller general to become President and CEO of the Peter Peterson foundation. I'm certain he is none the worse financially. Peter Peterson also financed and distributed IOUSA.

This is an ad hominem argument, and thus not strictly valid. However, they can be persuasive. Who is Peter Peterson? He is a wealthy banker type, who has long held it his mission to convince the United States government to dismantle social security and medicare. The current crisis was caused by banks and the housing bubble. Mr. Peterson and his foundation have used it as an excuse to advocate the gutting of programs designed to serve the middle classes and the poor. Mr. Walker's comments and IOUSA's arguments should be viewed in light of the agenda they are financed to serve.

http://www.zcommunications.org/peter-petersons-bad-economics-by-dean-baker

[N. M. Salamon]

Graeme:

Printing money does not solve the problem to those whose debt is owned by foreigners [USA] for the simple reason that interest rates will go up, and the REAL VALUE of the currency will go down.

A very large % of USA Treasuries is held in short term paper [most under 5 year term] thus the BOND OWNERS can insist on higher interest RATES in short term - which would break the bank [as it were, remeber the 18% prime rate and its effect on USA/ Canada, et al a few years back].

Other aspect of debasement is the inflation [esp in oil, industrial; base metals, rare earth, agricultural products etc] which would cripple the non-existent GREEN SHOOTS OF USA; and force foreign owners of USA funds to go on a shopping spree for these goods [increasing the economic pain of USA] - observe the Sovereign Funds buying spree of mines, oil fileds, agricultural land etc as they price out USA ability to compete on prices.

Furhter, other actions might be taken by those hurt via various USA policies, such as barring Wall Street from dealing in National bonds [please see :

http://agonist.org/michael_collins/20100310/economic_warfare_europe_versus_wall_street

Whrein such measures hurt the USA economy, causing further deteriation of USA tax-base.

NO YOU CAN NOT PRINT MONEY WITHOUT PAYING THE PRICE [Weimar Republic, Hungary, Zimbabve, Argentina, etc -- REMEBER HISTORY and take your clues from it!