Who Will Save America From Drowning in Debt?

Both political parties have failed to come up with any credible plan to solve this crisis, writes Jeremy Warner.

If you want to scare yourself with statistics, go to www.usdebtclock.org. This brilliantly conceived internet graphic engenders much the same feeling you get when watching the extortion of the meter in a London taxi; at some stage, you know you are going to have to get out and walk.

Amongst much else, what it shows is the real-time accumulation of US public debt. When I last looked, this was approaching $14.228?trillion, or around 100 per cent of GDP. Higher and higher, the big number goes. America is bankrupting itself as surely as Wilkins Micawber. So extreme is the country’s addiction to debt that if nothing is done, it will surely force the wholesale retreat from the New World’s century-old dominance of international economic and geopolitical affairs.

Worse, the medicine required to correct the problem threatens to be so strong that it may force that same retreat in any case.

According to analysis this week by the IMF, US public debt will still be rising five years from now, even assuming decent economic growth and taking account of known proposals for deficit reduction. By then, it will have reached 112 per cent of GDP. By the end of the decade, the annual interest bill alone will have reached $1?trillion, or more than a quarter of all current US federal spending.

America is rushing headlong towards the precipice, but its broken political system seems incapable of achieving the bipartisan consensus necessary to get a grip on the problem. Republican proposals for correcting the debt mountain appear as unacceptably extreme as the President’s are woolly and deficient. Barack Obama’s attempt this week to break the deadlock, with poorly defined plans to cut $4?trillion from the deficit over 12 years, was condemned by Paul Ryan, chairman of the House budget committee, as “hopelessly inadequate to address our fiscal crisis”.

By the same token, Ryan’s draconian proposals for reducing state spending to a bare minimum of defence, health care and welfare programmes was dismissed even by members of his own party as completely over the top. “There is nothing serious or courageous about this plan,” David Stockman, Ronald Reagan’s former budget director has said.

To some extent, this polarisation of views mirrors the austerity versus jobs debate we’ve been having in the UK, only it’s much more serious. In the US, the politics seems to prevent anything at all being done about the deficit, despite universal acceptance that it has to be dealt with.

Even the IMF, well known for pulling its punches when it comes to its largest shareholder, has been stung into issuing a rebuke by the urgency of the situation. There’s no credible strategy for stabilising public debt, the organisation said this week. Despite the fact that the US economy is judged to be growing fast enough to reduce borrowing, it is the only advanced nation other than Japan still increasing its underlying fiscal deficit this year.

But the problem goes far beyond the immediate difficulty of weaning the economy off the fiscal stimulus that helped America through the financial crisis. Underlying the immediate costs of the downturn, the US is stuck with an entitlements system which the growing demands of the ageing baby boom generation have made essentially unaffordable – or in any case, not without steep rises in taxation, an outcome that would be at odds with American traditions of rugged individualism, a small state, and low taxes.

In a report, the Congressional Budget Office summed up the problem: “Spending on social security and the government’s mandatory health care programs… will increase from roughly 10 per cent of GDP today to 15 per cent 20 years from now. If revenues and federal spending apart from those programs remain near their past levels relative to GDP, the spending on social security and healthcare will lead to rapidly growing budget deficits and mounting federal debt”.

America is deep in the mire, and seemingly lacks the leadership or political tools to dig itself out. Optimists point to the fact that the US has been here before. On several occasions in the past, they say, public debt has reached current levels relative to output, only eventually to be brought back under control. America can do it again.

Yet today’s borrowing is quite different from the type that has fed the debt mountains of the past. When the country was still young and filled with hope, it borrowed repeatedly and liberally from Europe to finance its railroads and other forms of infrastructure investment. The gamble paid off big time. But today, the debt is to fund private and government consumption. It’s just money down the drain.

The IMF has calculated that to bring public debt back onto a sustainable footing will require a fiscal adjustment over the next 10 years in terms of spending cuts and tax rises equivalent to a jaw-dropping 17.5 per cent of GDP. That dwarfs even the scale of the challenge faced by the UK, and America’s bipolar political system may make it impossible for agreement on such a consolidation to be reached.

Eventually, there will be an outright fiscal calamity in the US, and from that a leader will emerge with the wherewithal to lead the country back from the brink. Looking around the Washington scene today, though, it’s hard to see where that person will come from. Modern democracies seem to have become too compromised to produce saviours.

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