Politics & Policy

Entitlement Overstretch

This great country has reached such a point of fiscal insanity that we may need a monumental crisis to save it.

In the late 1980s, Prof. Paul Kennedy of Yale achieved academic celebrity with his bestseller, The Rise and Fall of the Great Powers. In it, he wrote that the United States was likely to collapse because of a phenomenon he called “imperial overstretch.” As Kennedy saw it, the approximately 6 percent of GDP the United States spent on maintaining its military and meeting other global commitments was too great a burden. It was only a matter of time until our ambitious agenda would push us into decline and eventual collapse. This thesis, as it applied to the United States, was simple, beautiful, and spectacularly wrong.

Kennedy’s overstretch theory was not, however, without merit. Hindsight makes clear that much of what Kennedy wrote provides a valid description of the Soviet Union’s collapse. Furthermore, while Kennedy misjudged America’s ability to sustain its military commitments, if he had looked deeper into our national balance sheet, he would have seen the true danger: entitlement overstretch. What the historian failed to see — because there was no historical precedent for him to analyze — was the dangers brought on by the rise of the entitlement state. The 6 percent of GDP spent on national security that so concerned Kennedy is dwarfed by projected entitlement expenditures that are far beyond America’s ability to pay.

There is a basic law of economics: What can’t happen won’t happen. As it is impossible for a $14 trillion economy to pay $60 trillion or more of unfunded liabilities, it won’t happen. Even after raising taxes to crippling levels and sucking every other revenue source dry, the United States will still face tens of trillions of dollars of expected payments it cannot meet. That being the case, only one question remains: What form will the nation’s default take?

The first option is a default in expectations. Unfunded liabilities are not yet debt, as the money has not been spent. The government is therefore free to change its implicit contract with the citizenry. In other words, it can renege on its promises with regard to Social Security, Medicare, and Medicaid. This requires a huge amount of political courage and a willingness to pay a severe price at the ballot box. As neither side of the political divide has shown any inclination toward taking the draconian measures that restoring fiscal sanity requires, there is little reason for optimism along this path.

The second option is the historical favorite of countries that find themselves in a fiscal crisis: debasing the currency. Because the dollar is the key global reserve currency and is viewed by many — irrationally, of late — as a secure store of value, the United States is able to issue all its debts denominated in dollars. Therefore, by pressing a few computer keys, the Federal Reserve can create $60 trillion in an instant. Of course, the Fed would be much cleverer about it and spread its money creation over a number of years or even decades. No matter how the debasement is done, though, the results are easy to foresee. Inflation on a scale that could see us envying Weimar Germany’s fiscal propriety would wreck the U.S. economy as the nation’s wealth and savings were destroyed. Unfortunately, this option always seems the most appealing to policymakers, as it is easy and apparently painless. Well, it is painless — right up until the cataclysm, the onset of which no doubt will be as sudden as the crisis of 2008. We must all hope that our elected officials are wise enough not to go down this road. Of course, betting on the wisdom of politicians is more often than not a fool’s wager.

The final option is to keep going as we are, making cosmetic changes of the type we have seen recently. This head-in-the-sand option will work just fine, until the calamity can no longer be postponed. In this scenario, the government runs up taxes until the economy falters while continuing to issue debt until it can no longer afford even the interest payments. This, for worse or worse, is the road we are heading down. Make no mistake about it: The final outcome will be crushing. Entitlement overstretch will cause the collapse of the national economy and end America’s global dominance.

But only for a time.

Modern nations do not just disappear. After a default, the United States will still have a productive population, a sound economic base, and, most important, a clean balance sheet. If we are lucky, our chastened politicians, given all these advantages and a clean slate, will then undertake only those commitments the economy can afford. If so, there is reason for optimism that, after the harrowing experience of default, the United States will roar back stronger than before. Conversely, if politicians prove incapable of mending their ways, then the country will join the list of serial defaulters and begin an inevitable and ugly decline.

It is a sad state of affairs when one has to pin the long-term hopes of this great nation on a crisis so monumental that one has to count on the “day after” to return reason to the nation’s fiscal policy. But at a time when proposals to cut a mere 1 percent from the budget can bring vested interests to the barricades, there appears little hope that policy sanity can be restored in any conditions short of a fiscal implosion.

Rumor has it that Professor Kennedy is now updating his seminal work for a new edition. One must hope that, this time around, he puts his finger on the true crisis undermining America.

— Jim Lacey is professor of strategic studies at the Marine Corps War College. He is the author of the recently released The First Clash and Keep from All Thoughtful Men. The opinions in this article are entirely his own and do not represent those of the Department of Defense or any of its members.

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