The Blues Admidst Hope


The Blues Admidst Hope

Feb 19, 2009 4 min read

Former Distinguished Fellow

Ernest served as a Distinguished Fellow at the Heritage Foundation.

With all eyes focused on how the Pelosi-Reid-Obama "stimulus" plan spends money, there's been less attention paid to where government will get the money -- and with what consequences.

It must come out of someone's pocket. The decision by "stimulus" sponsors? Borrow the money, mostly from foreign economies. America already borrows heavily from other countries -- especially the Chinese. But we should remember that whoever pays the piper gets to call the tune. Foreign lenders aren't inclined to whistle "Yankee Doodle!"

But foreign economies are not an infinite source of credit. They have their own troubled economies to worry about. And when they go looking for overseas investment opportunities, they're going to be looking for the best deal.

An America embarked on a wholly unprecedented spending spree is not an attractive deal to investors. Those who have maxed out their credit cards know that it worsens your credit rating, generating higher interest rates or even a total cutoff. You may feel stimulated after a shopping spree -- but your mood turns to depression when the bills arrive.

If the world decides our excessive borrowing makes us a bad credit risk, America's current financial problems will look like Easy Street. One temptation would be to print more currency to pay debts -- a sure way to produce Weimar Republic-style hyperinflation.

This stimulus bill is worse than just more big government, pork-barrel projects, expansion of the welfare system, and bailout of irresponsible state governments. It's the road to perpetual debt.

Some think we might cover that debt with huge tax hikes. But even House Speaker Nancy Pelosi's most audacious tax hike plans (going beyond the lapse of the Bush tax cuts) would not cover all the new spending. And tax increases would strangle any economic recovery. Yet rumors abound that Obama and his allies will use the extra debt as justification for letting the Bush tax cuts expire and adding higher new taxes on top.

The hypocrisy is breathtaking. Obama and other liberal Democrats claim that Republican objections to their debt plan have no credibility because the GOP spent way too much when it was in power. It's true that the GOP overspent, but how does that justify a spending spree that goes far beyond what Republicans did?

Borrowing is the centerpiece of how to pay for the enormous new spending. Even before the "stimulus" spending, Bloomberg News calculates that government has already spent $9.7 trillion in the name of economic recovery -- enough to pay off 90% of the home mortgages in America. On top of that, Congress and the White House propose even more debt and spending, including:

  • This year's $1.2-trillion deficit
  • The $827 billion for the "stimulus," plus its $368 billion interest fee
  • The next $350 billion to be borrowed for the second installment of last year's Bush Bank Bailout
  • The extra $2 trillion (estimated) for the Obama Bank Bailout just announced by Treasury Secretary Geithner.
  • New welfare spending, which a Heritage Foundation report estimates will cost a half-trillion dollars more (over the next 10 years) than called for in the "stimulus" plan.
  • An estimated $450 billion spending package that Congress is hiding in the wings until the "stimulus" passes.
  • $33-billion for another just-passed law to provide government health care to children in families making up to $84,000 a year
  • Open-ended spending on Obama proposals for nationalized health care, "cap and trade" energy controls, and other liberal dreams.

The accumulating debt -- over $4 trillion -- is too staggering to imagine to anyone outside the Obama administration. They chastise Bush daily for leaving a huge deficit, but they plan to treble it in their first year.

If Americans ignore it in shocked disbelief, Washington politicians will continue making it worse. Before all this, the Treasury Department's Bureau of the Public debt reports that the national debt is $4.3 trillion borrowed from government trust funds such as Social Security, plus another $6.4 trillion in "debt held by the public."

Disproportionately, those "public" lenders are foreign governments and their citizens. They hold about $3.1 trillion of that "public" $6.4 trillion.

Some lenders are friendly nations like England and Japan. But the latest Treasury Department numbers (November) show China's holdings in our national debt are up to $682 billion from $459 billion in the prior 12 months. Oil exporters such as the Mid East and Venezuela upped their holdings, and we now owe them $198 billion. We owe Russia $78 billion. And foreigners who use Caribbean banks for secrecy hold our markers for $220 billion. Treasury reports that this group -- China, the MidEast, Russia, Venezuela and the Caribbean -- have been our main sources for new borrowing in the last 12 months.

How much more can we borrow before our creditors cut us off, and Treasury securities become junk bonds that must pay exorbitant interest rates?

All the new debt can ruin the future. The Heritage Foundation's Brian Riedl estimates that in 2009 and 2010 the federal debt will increase by at least $30,000 for a household of four. The Congressional Budget Office reports that the "stimulus" package will actually cause our economy to shrink once the debt burden hits.

Since the feds would offer ever-higher interest rates to finance ever-higher debt, what will be left for private lending to boost the economy? While they denounce the credit freeze, government's big spenders likely will make it worse.

Heritage's J.D. Foster concludes, "[T]his policy will increase interest rates for all private debt such as home mortgages, consumer loans, and business loans. The near-term consequences of this debt bubble will be a deeper recession, a longer recession, and a weaker eventual recovery."

His colleague Riedl adds, "Congress does not have a vault of money to distribute into the economy. Therefore, every dollar lawmakers 'inject' into the economy must first be taxed or borrowed out of the economy, leaving total demand unchanged. If government borrows the money from American investors, investment spending drops accordingly. If it is borrowed from foreigners, net exports drop accordingly."

Even as he stirs up fears and condemns what he calls "failed policies of the past," Obama is pushing the very approach he condemns -- trying to borrow our way to prosperity and recovery.

Getting the money may cause even more problems than the big government spending. It's more than a dollars-and-cents issue. Falling deeper in debt to other nations, especially those who don't have America's interests at heart, threatens our national security.

Ernest Istook is recovering from serving 14 years in Congress and is now a distinguished fellow at The Heritage Foundation.

First Appeared in Human Events

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