April 8, 2011
By Jim Talent
As this article is written, the Republican House and the Democratic Senate are wrangling over the budget; there is a chance that the government will close down; and the president is scheduled to leave town and make a speech about energy policy in Indianapolis.
Confrontations over the budget are not a new thing in Washington. They have happened before, the most recent being in the mid-1990s, when the government (as everyone is endlessly rehashing now) actually did shut down for a short period.
But those debates were different than the one that is now occurring. In the past, the argument was about political philosophy. The Left believed that more government spending would make our society better and our economy stronger. The Right believed the opposite: that the size of government had reached a point of diminishing returns, so that reducing the burden of government would make everyone better off.
This debate is different. It’s not over what Washington should do. It’s over when and how Washington will do what it must do.
Arguing over what should happen presupposes that different options are realistically available. But the basic direction of budgetary policy is no longer optional. The government has run out of money, and its current rate of spending must and will substantially change.
If I am standing in the middle of railroad tracks when a train approaches at high speed, I do not have the option of staying where I am, no matter how much I may like my current position. My only two options are to move either before, or after, the train hits me.
According to official government projections, the government will run $7 trillion of deficits over the next ten years. The debt, which has doubled over the last four years, will nearly double again by 2021.
As I said, those are official projections. They probably underestimate what the deficits will be. In other words, if the government could continue borrowing at its current rate, it would likely have to borrow even more than it is now projecting.
But even the official scenario is fantasy. The government will never borrow $7 trillion over the next ten years. In fact, unless the credit markets see a substantial change in America’s budgetary policy, the government may well not be able to borrow the $3.5 trillion it is currently projected to borrow over the next five years. Long before the ten years are up, and possibly before five years have passed, the government will no longer be able to finance its deficits.
The government can’t force anyone to lend it money. It has to access the credit markets and get money from financial institutions and individuals on the promise that it will repay the money with interest.
Lenders can read deficit projections as well as anyone else. They already suspect that the government will not reduce spending substantially and will instead inflate the currency in order to make it easier to repay its debts. They are also concerned that recovering economies around the world will demand more capital and put pressure on the credit markets. As those suspicions crystallize into something approaching certainty, lenders will demand a higher interest rate before loaning the government more money. That will increase the debt service the government must pay, which means the government will have to borrow even more money to make its interest payments, and that will drive up interest rates further, until eventually the government cannot leverage itself any further.
At that point there will be no more money, and the spending will stop. The economy will go into a stall; the middle class will be in danger, and poor people — who depend on government services more than anyone else — will be in desperate straits.
It happened to Greece and Portugal. It is happening in several states now. It will happen to the U.S. government as well. Over the last few years, the government wasted most of its credit reserve on spending that was at best nonessential. Moody’s has already threatened to lower the government’s bond rating, and the Treasury has been reduced to financing its borrowing entirely with short-term bonds. Lenders are unwilling to buy longer-term notes, because they suspect interest rates are going up.
A final and fatal run on the government’s credit could be triggered by any one of a number of events: a successful terrorist attack or other major global disruption, an economic downturn, a significant miscalculation by the Federal Reserve, or the insolvency of a state.
So the current budget confrontation is not like the confrontations of the past. It is not a clash of political visions. It is a struggle between those who, like Rep. Paul Ryan, are willing to grapple with reality and those who are not. Given the stalemate in Congress, and the president’s desire to avoid responsibility, there will probably be no fundamental change in budgetary policy in the very near future. But, as the line attributed to Otto von Bismarck goes, “God protects fools, drunkards, and the United States of America.” Our country may yet make it through, if by good fortune the reckoning is postponed a while longer, and if the next election brings in a group of leaders who act decisively before our luck runs out.
Jim Talent is a distinguished fellow at The Heritage Foundation.
First appeared in National Review Online
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