There is finally some progress toward deficit reduction, more than two years after the dawn of the era of trillion-dollar annual budget deficits stretching far ahead. The administration was astoundingly late giving any indication of taking the issue seriously. Paul Volcker, Larry Summers, and Timothy Geithner, from their execution of previous positions, were all well qualified to see the dangers of such immense deficits, yet the administration stalled for nearly two years waiting for the Bowles-Simpson debt commission, and then ignored its generally sensible and often imaginative report.
The administration produced a budget that contained a $5 billion continuing-resolution budget cut, in the circumstances an in-your-face dismissal of concern about the deficit. It then appeared to be waiting for Paul Ryan’s budget-committee report, confident in the belief that it would be such an assault on the less-advantaged people in the country that it would blow up in the faces of the Republicans. And then came the final countdown to a shutdown of the government, which, it seems to have been assumed, would have been a disaster for the Republicans. Finally, this week, nearly 27 months into his four-year mandate, a deficit-reduction message from the president.
Even if the president’s proposals were comprehensive, imaginative, and equitable, looked likely to attract the bipartisan support necessary for enactment, and raised depleted international confidence in the fiscal and monetary policy of the country — all outcomes that appear wildly excessive to the probabilities, since the president is still banging the tambourines about soaking the rich, which he mistakenly defines as families with annual incomes exceeding $250,000 — it was still no definition of leadership to ignore the issue and aggravate the problem with steroid-bloated deficits, including a massive campaign of disinformation about the cost of the administration’s health-care reform.
Such progress as there has been consists in three events: The Ryan Plan is worthy of serious discussion, and is not the country-club Republican exaltation of the rich that was forecast and has been claimed; the government shutdown was avoided, and the deficit reduction of $38 billion ($400 billion over ten years) pushed domestic discretionary spending back almost to 2008 levels; and the president has finally been drawn seriously into the discussion. Any progress is welcome but this looks like very little, very late. There is still no real prospect of a consensus adequate to make the substantive changes required, which include a complete overhaul of health care and serious adjustments to Social Security. Congressman Ryan addressed the first, but not the second.
The debt bomb is now rivaled as a problem by the excessive money-supply increases of the Federal Reserve and the threat of inflation. I have written here before that these huge deficits are essentially money-supply increases, as the money has been effectively printed and spent, and that the claims that the related debt can be retired painlessly are spurious. There is no evidence that the issuers of any of the three great currencies, the dollar, euro, and yen, have the will to pay down the debt rather than devalue the currencies in which, in each case, it is denominated. But at least the Europeans and Japanese are trying to apply the brakes, as Europe has followed Canada and Australia, the two most successful large economies (GDPs of $1 trillion or more), in interest-rate increases. The U.S. dollar has been falling against even soft and untrustworthy currencies such as the Russian ruble.