Economy & Business

Dress Rehearsal for Fiscal Armageddon

A worker picks up trash on the National Mall near the Capitol building as the partial government shutdown continues in Washington, D.C., January 6, 2019. (Jim Young/Reuters)
This little shutdown is a blip. The debt crisis is an atomic bomb.

The angst and wailing over the brief shutdown of a fraction of the federal government is instructive. The left-leaning news and commentary is full of dire scenarios about hard-working . . . whatevers . . . “running out of peanut butter and jelly,” as one SiriuxXM Progress host put it. Federal employees on average earn 50 percent more than their private-sector counterparts, but apparently they are living paycheck to paycheck.

But the conservative side of the radio and television dials is not without its own tales of woe. Think about the contractors who may never get paid. Think about all of the restaurants and doggie daycares and dry-cleaners who are suffering because their federally employed customers have no spending money. We are indeed all Keynesians now, apparently. Stimulate that demand!

This is what happens when a relatively small group of federal workers don’t get their paychecks.

Imagine what it is going to look like when the Social Security checks stop coming.

Around 2038, less than 20 years out, total spending on the major entitlements — Social Security, Medicare, Medicaid — plus interest on the debt will exceed all federal tax revenue. Put another way, come 2038, if we put every dollar Uncle Stupid collects in taxes toward Social Security, Medicare, Medicaid, and interest on the debt, all of that money combined will not cover those expenses.

Fiscal Armageddon is coming.

Which is to say: If the federal government does not do something to reform its long-term finances, then a fiscal crisis of some sort is inevitable. No one knows exactly what it will look like, and no one knows what the consequences will be when a country responsible for about a quarter of the human race’s total economic output becomes insolvent. Hard to say, really, how that will shake out. Safe to say it will be ugly.

Most likely, the U.S. government will have its choice of angry mobs: Either it will pay the blue-haired hordes to whom it has promised lifelong incomes and medical benefits, or it will pay the pinstriped hordes who have bought its debt over the years. The most likely outcome is that the bond market eventually calls bullsh** on how Washington does business, and our era of historically low interest rates becomes . . . history. If interest rates return to something like their historical average, then those interest payments will amount to, in approximate fiscal terms, a second Pentagon. And there is no reason why the historical average should be thought of as a likely limit. If interest levels should approach the high they hit in the 1980s — lights out.

If we are lucky, that train wreck happens slowly rather than all at once. But let me ask you this: Given a choice between p***ing off a bunch of grandmas, who might turn around and vote against them, or p***ing off bond investors who have the power to cut off their credit and force them into a pay-as-you-go system that will certainly cause a national economic calamity and still p*** off those grandmas, plus a whole lot of other people — which do you think Congress will choose.

Good luck, granny.

Our Austrian friends (the economists, not the ladies and gentlemen of Vienna) talk about something they call “malinvestment,” which is, in the Austrian view (forgive my simplification here), the source of recessions. Government policies of different kinds — especially policies that keep interest rates artificially low for extended periods — distort the credit markets and price signals, causing investors to put their resources into projects that make sense only in the distorted easy-money environment. Once economic reality reasserts itself, as it always does, those investments become losing propositions, and the period of unwinding those investments and moving capital into new ones is a recession.

Since the end of World War II, a lot of Americans have made a lot of decisions about their own lives — about work, savings, spending, education, and more — and a lot of decisions about their business enterprises based on expectations about Social Security and other entitlements. A lot of retirement condos have been developed in a lot of warm and sunny places, a lot of nursing homes have been built, golf courses planted, infrastructure developed, etc., based in part on expectations of government support for old people that probably will not be met.

About 400,000 federal workers have been furloughed. They will go without pay for a while, probably a few weeks, maybe more. There are 68 million people on Social Security. And when their benefits get reduced or eliminated, it is not going to be for a few weeks. It is going to be for a long, long time — possibly forever.

The long-term picture is bad. The short-term picture is much better. The United States is not in a fiscal crisis right now, and there is no reason to think that there is one right around the corner. But there will be one if the government does not reform its finances. That is something close to a mathematical certainty. The time to undertake that reform is now, when there is no crisis, when things are going pretty well and we have lots of choices about how to tighten up and lots of resources to throw at our problems. That won’t be the case in 2038 — or whenever the crisis comes.

This little shutdown is a blip. What’s coming is an atomic bomb. If you knew that an atomic bomb was going to go off in your backyard in 24 hours, you and your family would survive — because you would choose not to be there. You can get a long way away in 24 hours. You have fewer options if it’s 23 hours . . .  22 . . . 21 . . .

We don’t have to sit around waiting for the bomb to go off. We have options. Let’s use them.

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