Bush will leave us holding the bag...again

I was reading an article in the Atlantic Monthly about the exact problems with Bush's fiscal policies. It's very enlightening and very depressing. In general, we all know that the problem with borrowing more than you can repay is that the bill comes due at some point. The Bush administration has either not figured this out, doesn't care, or doesn't believe that it will happen (and given their steadfast denial of reality, the latter doesn't seem impossible).

To sum the situation up using an analogy, it's as if a person making $30,000 a year were borrowing say, $2,000 a year. Now this person is repaying the interest on the borrowing, but not the principal. Well, after a long enough time span, the person has borrowed enough that they can't even repay on the interest fast enough to cover the new interest charges each month. As the article says, we're approaching that point every day, even if it is years and years away. The question is, do you feel ok with leaving this debt to your descendants? I hope not.

Anyway, there's a lot of good points in the article, which I'll quote here, but I still suggest you read the article in full.

Before Katrina, at any rate, the administration was still insisting that the budget deficit would fall over the next few years. That prediction might have been right if Katrina and Rita had not happened and if Iraq had come good — at least if one further assumed that no other emergencies would arise, that most of the administration's tax cuts would be reversed by the end of the decade (which the administration itself, of course, is determined to block), and that demographic pressures (which are causing the government to pile up vast liabilities for Social Security, Medicare, and Medicaid) would magically abate. On this side of the looking glass the deficit will not shrink unless something bold is done.

For those who find its budget forecasts unconvincing the White House has another line — one that slightly undercuts its assurances of fiscal responsibility. It is that the deficit does not matter. Economists have been predicting fiscal meltdown for years, officials point out. It has not happened and it won't, they say, even if the deficit sticks. The reason is that foreign investors just love this country's assets. The resulting flow of funds — a global vote of confidence in American capitalism — means that the government can borrow without strain. Spend more, tax less, be happy.

It sounds like a confidence trick, and in the end it is — though, like all the best scams, it contains particles of truth. For much of the past decade private foreign investors have poured funds into the United States because they saw faster economic growth and better returns than were available elsewhere. As long as that kind of investment keeps flowing in, the deficit can be financed painlessly. Government spending still has to be paid for eventually, mind you — it is only a question of taxes today or taxes tomorrow. But a willing inflow of capital means that the eventual, inescapable cost to American taxpayers can be postponed at little risk.

Another thing helps. America enjoys the rare privilege of being able to borrow what it needs — currently on the order of $782 billion a year — mostly in its own currency. Countries heavily in debt usually have to borrow in a foreign currency. If they later get into trouble and the foreign-exchange market drives their currency down, the burden of their debt, measured in local money, weighs heavier, pressing them into an even deeper hole. But if the United States got into that kind of fix and the dollar fell abruptly, the value of America's debt would not rise. Instead the countries that had lent the dollars would see the value of their investments (measured in yen, say, or euros) fall.

But not this much less. If America were borrowing at half the present rate, it could probably relax. But $782 billion a year — more than six percent of GDP — is outlandish.

This summer, before Katrina, the economist Brad DeLong put the chance of a major U.S. financial crisis at 20 percent. The former Fed chairman Paul Volcker puts it at 75 percent within the next few years if we don't change our policies. Stephen Roach, the chief economist at Morgan Stanley (and a notorious pessimist), dunks it's about 90 percent. Whether any of these predictions is close to the mark is anyone's guess, but that's not the point. The point is that the chance of a bad outcome is substantial — and much higher than it needs to be.

So here's some talking points: the Bush administration claims the deficit will shrink, which is true if you don't factor in the tax cuts that the Bush administration is still hawking, and don't plan for any unexpected budget outlays (Katrina or Iraq). The Bush administration counts on other nations being willing to invest in us, which condition remains true only so long as they're earning a return. This will not help us when we've over-borrowed and can no longer pay back the principal.

This sums it up nicely:

Unfortunately, big-government Republicans see no need for such measures; they look at deficit hawks and see Chicken Littles. But this fiscal environment is more dangerous than any other America has faced in its modern history. Without corrective action the sky may fall.