Politics & Policy

Tipping Points

We need swift, wise fiscal action to fend off financial disaster.

Some have been sounding the alarm about our government’s mounting debt for decades. In the past, they were generally dismissed as alarmists crying wolf. Today, however, most Americans clearly hear the lupine claws of national debt scraping at the door.

More and more Americans now share the unpleasant feeling that our nation (indeed, the entire Western world) has edged up to some sort of fiscal precipice. Moreover, the concern is not sparked by a specific policy or confined to a particular demographic or interest group.

#ad#A clear majority of Americans now expect our military might to fade over the next two decades, polls show. By a three-to-one margin, they believe their children will inherit a country on a downward trajectory. Nearly half say it is no longer possible for a person to work hard and become rich. As President Obama said at Carnegie Mellon University this week, there is a growing “sense that the American dream might slowly be slipping away.”

Unsurprisingly, trust in government has cratered. “Just 22% say they can trust the government in Washington almost always or most of the time,” the Pew Research Center recently found. It’s among the lowest ratings in half a century. Congress now suffers the lowest favorable rating (25 percent) in a quarter century of Pew surveys. Call it the New American Malaise.

Is malaise justified? Certainly, we seem to be reaching numerous “tipping points” on the road to fiscal Armageddon.

For starters, soon foreigners will own a majority of our debt — and we are getting deeper into hock to them every day. Last year marked the single largest expansion in government debt ever. Federal debt alone accelerated past the $13 trillion mark last week.

President Obama’s budget forecast reflects a cock-eyed optimism about our fiscal future, yet even it projects total U.S. debt will rise from 2009’s 53 percent of GDP to 90 percent by 2019. “Most economists,” Sen. Judd Gregg (R., N.H.) notes, “will tell you that an economy can handle between 30 and 40 percent debt as a percentage of GDP. But a nation’s economy starts to get into trouble when that ratio gets up around 60 percent of GDP. When it gets up to 80 percent of GDP, basically an economy can’t handle that for very long.”

The day of reckoning may already be here, according to a new study by the International Monetary Fund. It pegs our “general government gross debt” for 2010 at 92.6 percent of GDP. By 2014, the IMF estimates, government debt will pass the 100 percent–of–GDP tipping point (hitting 106.4 percent to be exact) and keep on going. To forestall a Greece-like fiscal catastrophe, the IMF says, lawmakers must act now to reduce government debt by more than $1.6 trillion. Instead, Congress is looking to pass an “extenders” bill that will run up hundreds of billions more in debt.

And the economic consequences are severe. Each 10 percent–of–GDP increase in debt, the IMF has found, slows economic growth by 0.25 percentage points per year.

Another just-reached tipping point makes it harder for Congress to paper over its excess spending. Social Security is now operating in the red, six years earlier than expected. Until recently, Social Security payroll taxes were Uncle Sam’s cash cow, subsidizing other federal programs to the tune of $100 billion–plus annually. Now, all those revenues — and then some — are needed just to cover each month’s Social Security payments.

#page#For now, it’s debt and more debt, as far as the eye can see. And debt is expensive. How expensive? Interest on the national debt will triple over the next six years, to approximately $600 billion per year. By 2017, interest payments on the debt will exceed federal spending on education, energy, transportation, housing, and environmental protection combined.

But the real malaise makers are tipping points that suggest bigger government and higher taxes may be irresistible:

#ad#‐Last year, 47 percent of all American households paid no income taxes. (It was only 32.6 percent in 2007.) Soon a majority of Americans may see government spending as a free lunch — a fount of more and more benefits that costs them nothing.

‐The government’s role in our health sector is growing so fast that before long, government programs will account for a majority of all heath-care spending. By 2012, nearly three of every four American children could be eligible for government-run health care. Can we really “bend the health-care cost curve” down when so much health care is “free”?

USA Today recently identified “a major shift in the source of personal income from private wages to government programs.” As a share of personal income, paychecks from private business are now at an all-time low, while government-provided benefits have never been so high.

‐Unions now represent more government employees than private-sector workers. It’s no accident that public-sector unions have injected themselves forcefully into virtually every recent state and federal battle over taxes and spending. Their interests are higher taxes and bigger government.

It really adds up. Preliminary research for the Heritage Foundation’s next Index of Dependence on Government indicates that dependency increased more in 2009 than at any time since the Jimmy Carter era. The largest spike in dependency came in the areas of health and welfare.

As dependency soared, economic freedom waned. Last year, the United States fell from the ranks of “economically free” nations, according to Heritage’s Index of Economic Freedom. Today we are the Land of the “Mostly” Free. The prime reason for our historically poor showing: our internationally high levels of debt, spending, and taxation.

But do we really need to act now, as the IMF suggests? Europe has been a slow-motion fiscal train wreck for decades. Don’t we have at least that long before we need to get serious? Maybe not.

Harvard history professor Niall Ferguson recently challenged the conventional wisdom on what he describes as “a theory of imperial rise and fall” whereby empires “appear, rise, reign, decline, and fall according to some recurrent and predictable life cycle.” Under this theory, the decline of empires is “slow-acting, with multiple overdetermining causes.”

#page#But, Ferguson asks,

what if history is not cyclical and slow moving but arrhythmic — at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

Indeed, Ferguson recounts the history of decline in empires as geographically and chronologically distinct as ancient Rome, the Bourbon monarchy in France, the British Empire, the Ming dynasty in China, and, of course, the Soviet Union. Ferguson contends that these empires dissolved rapidly, often within a single decade. The fall, moreover, often stems from “sharp imbalances between revenues and expenditures, as well as difficulties with financing public debt.” The implications for the U.S. are profound:

Alarm bells should therefore be ringing very loudly, indeed, as the United States contemplates a deficit for 2009 of more than $1.4 trillion — about 11.2 percent of GDP, the biggest deficit in 60 years — and another for 2010 that will not be much smaller. Public debt, meanwhile, is set to more than double in the coming decade, from $5.8 trillion in 2008 to $14.3 trillion in 2019. Within the same timeframe, interest payments on that debt are forecast to leap from 8 percent of federal revenues to 17 percent.

#ad#This fiscal weakness may not be the proximate cause of a crisis, but could work to weaken a long-assumed faith in the United States’ ability to weather any crisis. Ferguson concludes with a sober warning:

But one day, a seemingly random piece of bad news — perhaps a negative report by a rating agency — will make the headlines during an otherwise quiet news cycle. Suddenly, it will be not just a few policy wonks who worry about the sustainability of U.S. fiscal policy but also the public at large, not to mention investors abroad. It is this shift that is crucial: a complex adaptive system is in big trouble when its component parts lose faith in its viability.

Conservatives must not only acknowledge the severity of our current situation, but prepare and promote serious alternative policies to fend off precisely the sort of sudden and cataclysmic financial meltdown of which Ferguson writes.

Malaise won’t cut it. Only swift, wise fiscal action will do.

Michael G. Franc is vice president of government relations for the Heritage Foundation.

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