Economic Sanity for 2012
Obama and Romney should get serious about the debt.


Conrad Black

There are some obvious steps available to the administration to incite more credible inferences of economic progress that don’t require legislation, and should not be complicated, even in this very odd election campaign. Longer-term interest rates have just finally started to inch up, and there has been slight progress in the last couple of years to term out federal debt a little.


It is a truism, often hammered like a piñata throughout the Obama years, that $1.3 to $1.6 trillion annual federal deficits, in a country that had a conventional money supply of $900 billion when this regime was inaugurated, could not continue indefinitely without disastrous consequences. There is not the least indication of any national or official will to repay the new debt. And there is little likelihood of any timely growth out of the debt back to manageable debt/GDP ratios, as consumer spending won’t revive quickly until family and personal debt have receded further. More acquisitive consumers largely benefit foreign luxury-goods and engineered-products industries anyway.


Historically high levels of employment won’t be achieved until the service industries have given some part of their share of the economy back to more traditionally value-adding sectors. In all these circumstances, this mountainous new debt has much of the character of money-supply increases, and inflation has made greater inroads than is apparent, in response to such steroid-driven demand increase. Food prices have moved up quite sharply at times, and there is much concern about gas prices, which respond to a weaker dollar, and should produce moderated consumption. But bombed-out, deflated sectors like housing are disguising higher-inflation components of the inflation index, and though there is inflation in the gasoline price, it is mitigated to some extent by increasing domestic production and natural-gas use, as oil imports have declined from 60 percent to about 45 percent of the country’s consumption.


The administration’s predictions of deficit reductions are moonshine, from the same school of imaginative arithmetic that gave us the $900 billion cost of Obamacare, already acknowledged to be a very large underestimation, and the extent of the deliberate (unless the president and his entourage are insane) underestimation will certainly grow. Built into the Treasury’s roseate projections of an inexorable, slow march to budgetary balance are wildly optimistic notions of tax-revenue increases in defiance of historic patterns when taxes are raised, and of spending reductions, including swingeing cuts in defense costs that Secretary of Defense Leon Panetta reassures us (for which most are grateful) will not happen.


In the next five years, the rates for three-year Treasuries are likely to rise, according to the Congressional Budget Office, from 0.1 percent to 2 percent. The same source expects the cost of ten-year Treasury notes almost to double, from 2.03 percent to 3.8 percent. In the last two years, the percentage of U.S. Treasuries maturing within three years has declined from 55 percent to 52 percent, but the quantum of that early-maturing debt in these profligate days has risen from $3.85 trillion to $5 trillion. Publicly held federal debt has risen since 1997 from $4 trillion to $11 trillion today, but the cost of servicing it in that time has actually declined, from $245 billion to $225 billion.


The logic of these numbers — especially given that the CBO estimates of likely rate increases, though not as wildly euphoric as the administration’s deficit projections, are likely conservative — screams out at anyone familiar with Grade Three arithmetic. The administration should borrow forward as far as it reasonably can, and combine that with a serious proposal for deficit reduction, including entitlement reform and some elective consumption taxes on luxuries that would not inconvenience modest-income families. This would be believable, and the Republicans would almost certainly support it. Mr. Obama could transfer his tawdry soak-the-rich agenda from taxes based on Warren Buffett’s grandstanding fable to self-indulgence in luxury expenses; from a demagogic will-o’-the-wisp to collectible supplementary revenues that would essentially come from foreign luxury-goods and engineered-products industries that have had a free lunch at this country’s expense for decades.


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