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.
The real rate of inflation, since World War I, has been vastly greater than normally published figures would indicate; the price of gold alone has risen 50-fold in less than 80 years, and of oil more than 40-fold in 40 years, and those are the two most distinguished commodities. Because there is no valuation of currencies except other floating currencies, the central bankers and government treasurers of the world have just been devaluing their currencies more or less in unison. But from time to time, relatively serious efforts are made to retard the nosedive. The Federal Reserve has increased the monetary base by $500 billion since December, while the Europeans, for all their problems, have been trying to stabilize the euro.
Though the figures are a bit sketchy, real U.S. disposable income fell in February and the rate of inflation appears to be about twice the level of inflation-adjusted GDP growth, and to be rising at a rate of over 5 percent. Energy and food prices and a wide range of other goods-and-services costs are rising, and real (inflation-adjusted) wages are actually falling, though, on the positive side, recent employment figures are buoyant, largely because of retention of the Bush tax cuts (which the administration passionately opposed until the “shellacking”). If energy prices were rising because of increased gasoline taxes, to reduce the budget and current-account deficits, and being counteracted by serious programs promoting increased oil exploration and alternative-energy use, this could honestly be spun as positive. But gasoline is approaching $4 a gallon, and has surpassed it in about ten states, because of a depreciating dollar and a global lack of confidence in American economic management, a lack of confidence apparently shared by most Americans. No one seems to, and no one should, believe Fed chairman Ben Bernanke’s famous assertion, on television’s 60 Minutes, that he was “100 percent confident” of his ability to control inflation.
Almost no serious person claims to envision how inflation can be controlled, the deficit reduced, the money supply reined in, and recession avoided. The best try for these objectives is most closely approached by the Ryan Plan, though even that is only a start: the pursuit of economic growth through shrinking the public sector as a share of GDP and tax simplification and reduction, and health-care reform. Yet his proposals cut next year’s deficit by only 15 percent. What is needed, and no one now on the scene has the credibility to propose it, much less to get it adopted, is to add to the Ryan Plan a 25 percent flat tax and the elimination of most exemptions; increased taxation on most categories of sales and transactions and of sophisticated employer-provided health care; a rise in the retirement age, including for Social Security; and attachment of the dollar to a standard composed of gold, oil, and the Consumer Price Index. A return to the gold standard would be too narrow, and would confer too much importance on mining engineers and gold prospectors.
The long era of complete indiscipline as the world’s governments devalued their currencies while disguising it by doing so in unison, must end before the leading currencies cease to be hard currencies at all. Central bankers, in an absence of political will, have taken over responsibility for economic management, but what is needed cannot be achieved entirely, or now even principally, by monetary policy alone, and particularly not by completely unsustainable increases in the de facto money supply. A radical restoration is needed urgently, and would be good politics, if designed and presented well by a believable leader. So it will happen. President Obama could still do it, but it would require the greatest policy U-turn since the Nazi-Soviet Pact.