Growth vs. Austerity

Is there a debate within the conservative movement between the partisans of economic growth and those of austerity? Our friends at Forbes continue to think so:

But then, in a column entitled “Hope is Not a Policy,” NRO Deputy Managing Editor Kevin Williamson criticized  Forbes columnist Ralph Benko and CNBC’s Larry Kudlow for emphasizing the need to pursue policies that could lead to 5% growth, calling such efforts “magic unicorns.” Instead, he advised, we should be comfortable with a 2% per year growth rate, pointing out such a growth path would lead to a doubling of GDP in the next 35 years.  What he fails to explain is why the American people should be satisfied with anything less than the 3.2% average rate of growth since 1950 – which includes all of the recessions and periods of sub-par growth through 2010.

I did not write, and do not believe, that Americans should be satisfied with 2 percent real growth. I wrote that they probably should expect it. If government had a magical formula for creating growth in the economy, it would be deployed, and I would endorse doing so. I want strong growth. Barack Obama wants strong  growth. With the exception of a few environmentalist kooks and Shining Path adherents, everybody wants strong growth. But government has no such formula for growth. 

What I believe is this: We have a serious fiscal imbalance, one that should be addressed immediately with policies based on current plausible projections of economic growth — not on what we wish growth would be. If you cut spending to get the deficit down to a manageable size and do so based on an assumption of 2 percent real growth or thereabouts, what happens if you get growth well beyond that? I do not see a downside: You will see higher-than-expected tax revenues, lower-than-expected spending on things like unemployment benefits, etc. Consider the opposite scenario: You adopt an overly optimistic assumption about growth, and then real growth comes in well below that. What happens then? Lower-than-expected revenues and higher-than-expected spending, meaning a bigger-than-expected deficit. Plan for the worst and bless Providence if it doesn’t come to pass. (That is one possible definition of conservatism, no?) 

There are indications that we do not have as long to get this done as we would like. The ChiComms just dumped their short-term Treasury debt. They’re reducing their long-term holdings, too. The deficit is 43 percent of federal spending, and possibly going up: A couple of hundred billion dollars have just been added to the cost of the Fannie-Freddie bailout. 

U.S. Treasury bond rates currently are quite low, but the key question for U.S. government bonds, as Bill Gross puts it, is, “Who will buy them?” Not Bill Gross: He runs PIMCO, the world’s largest bond firm, which famously has dumped its Treasury holdings and is now short the bond. China is selling, not buying. Japan, the No. 2 foreign holder of U.S. government debt, is in a crisis of its own and desperately trying to raise money in the wake of an enormous natural disaster and in the face of a possible credit downgrade. Next comes the United Kingdom, which is busy thanking its lucky stars it didn’t give up the pound but still will feel the pinch of the European credit crisis. The next biggest buyer is the bloc of oil-exporting countries, a collection of largely unstable and/or hostile regimes that comprises Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. Which of those looks like a reliable financier for the world’s largest debt? So, who is going to buy — at the current low interest rate?

I’d be a gazillionaire if I could predict which direction bond rates will move with any accuracy, but I don’t see how the current low rates endure indefinitely — not when the big players in the market already are saying they’re too low. So, what happens if they go up, and go up suddenly? We have trillions of dollars in debt to roll over, on top of the new debt being issued. Who will buy it?

In 2007, the U.S. budget deficit was a grand total of $161 billion, or just over 1 percent of GDP. The U.S. budget deficit in 2011 is going to be ten times the 2007 deficit, $1.65 trillion, or about 3 percent of GDP — not 3 percent of U.S. GDP, but 3 percent of the entire world’s GDP. How long do you imagine we can keep financing that much borrowing at concessionary rates?

The choice is not between growth and austerity. God knows we need a dose of both. The difference is this: Congress can impose a balanced budget (or, more realistically, a less-imbalanced one); Congress cannot impose growth. So enact a balanced-budget plan, already, or a near approximation of one, it being understood that the goal need not be a zero deficit tomorrow but an arrest of the debt pileup and a smooth and steady decline of the debt as a share of GDP. I suspect (but do not know) that a sensible fiscal-reform plan, adopted with bipartisan consensus, would encourage growth, calm markets, encourage investors and hiring managers, and make reducing the proportional size of the debt that much easier. But talking about growth is, I fear, a way for politicians to avoid talking about cuts – and we cannot afford to put them off. Conservative happy-talk is still happy-talk. And I would not bet the future of the republic on it: If our marker gets called in, it’s going to be a rough time making good on it.

— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, published by Regnery. You can buy an autographed copy through National Review Online here.