Nov 16, 2010
Sometimes American commentators question why the Europeans are so much more worried about their national debts than we are. Today’s news from Brussels gives one good reason: European Union leaders are scrambling today to keep Ireland and Portugal off the edge of a debt crisis, following the Greek crisis earlier this year. Are the budget problems in the United States anywhere close to that level? Absolutely not. Our real debt problems are long-term, and we’ve got a lot more room to maneuver. But a new report by the government’s own auditors underscores that our budget’s on an unsustainable track, and it makes sense to start doing something about those problems now to ensure a debt crisis never happens.
Heading Off the Next Crisis: Ireland, Portugal and the EU
The European Union finance ministers are meeting today, trying to keep Ireland’s debt problems from spreading. The next most likely candidate for this kind of malaise is Portugal, where the deficit is smaller but the government has been reluctant to act. Interest rates on both Irish and Portuguese bonds have been soaring, an indication that the world’s bond markets are less and less confident that those countries have their fiscal problems under control. As the New York Times says this morning:
“While some important details are different, the current situation feels eerily similar to what happened months ago in Greece, where the cost of borrowing rose precipitously.”
Under EU rules, Ireland and Portugal would have to request help for a bailout, and as of this morning, both nations have said they’re not going to do that.
The real question is: What could this mean for us? For a start, turmoil in the global financial markets isn’t good for anyone. Just as in the Greek crisis this past summer, this new financial turmoil raises questions about whether the U.S. could ever wind up in the same position. Almost all economists would say we’re nowhere near the dire straits of Ireland or Greece. The American economy is much larger and healthier, our deficits and national debt are much smaller in comparison to our overall economy, and we have a lot of options still to bring our budget into line.
We also have an advantage in that we control our own currency. Greece, Ireland and Portugal don’t, because they’re using the euro. That means a government can essentially “print more money” and buy its own bonds if others balk, not unlike the “quantitative easing” the Fed is doing right now to stimulate the economy. That can buy a nation some breathing room, but it also has big risks, such as overdoing it and causing hyperinflation.
There’s a school of thought that a country that controls its own currency can never face a budget crisis, because it can always create more money. Most economists and budget agencies disagree with this theory, and economist Paul Krugman sums up the reasons very well in this post on his New York Times blog
In a word, we’ve still got what the International Monetary Fund and other economists call “fiscal space”: namely, “room to maneuver before we get into too much trouble. But the IMF still warns we have problems, and our maneuvering room isn’t unlimited. If we start phasing in some changes now, we can avoid any long-term budget problems. But the longer we wait, the harder it will be.
Underscoring the Unsustainable
As the independent, nonpartisan agency that serves as the U.S. government’s auditor, the Government Accountability Office spends a lot of time giving the government bad news, and yesterday that included the GAO’s regular Long-Term Fiscal Outlook report. Actually, the GAO said the outlook is actually somewhat better, thanks to the efforts to control health care costs built into the new health care reform bill. But that alone won’t do the job:
“These long-term simulations show that absent additional policy actions the federal government faces unsustainable growth in debt. Health care legislation enacted earlier this year has the potential to slow the growth of federal health care spending. However, even under the more optimistic Baseline Extended scenario, which assumes the full implementation and effectiveness of cost control provisions, debt grows continuously over the long term indicating that more needs to be done. As policymakers consider both the current economic weakness and any recommendations put forth by the National Commission on Fiscal Responsibility and Reform and other policy groups, it is clear that over the long term historical levels of spending and revenue cannot be maintained going forward.”
Here’s the full GAO report, including charts:
Vandalism, Earmarks and DIY Budget Solutions
Economist Glenn Hubbard, former chairman of the Council of Economic Advisors, has strong feelings about tax policy, and he’s willing to ruin a blackboard to say so:
“When I left my job as the deputy assistant Treasury secretary for tax policy in 1993, I left a message on my office blackboard for my successor. I wrote, “Broaden the base, lower the rates” repeatedly until I filled the entire space. I then had it covered with wax so it could not be erased. (Yes, the government charged me for my bit of vandalism. But it was worth it.)”
Earmarks may finally be done for, with a turnaround by Senate Minority Leader Mitch McConnell, one of the main defenders of the practice. Christopher Beam in Slate says McConnell was right the first time around: “Let’s stop pretending earmarks have anything to do with deficit reduction.”
Washington Post blogger Ezra Klein scopes out Four possible deals on the Bush tax cuts.
David Leonhardt continues to respond to reaction to the The New York Times’s You Fix the Budget interactive tool and today he takes on progressive criticism that the feature doesn’t let erstwhile policy-makers “soak the rich” as much as it might. Leonhardt acknowledges that “post-tax income for the rich has soared, while post-tax income for the middle class and poor has risen only modestly” in recent years, but he argues that the NYT team limited the policy choices to those which are politically feasible: “The options for taxing the rich in our deficit puzzle, taken together, would represent a major policy change.”
Soaking the Rich, Cutting the Deficit
Meawhile James Pethokoukis of Reuters had a go and took the opposite tack, balancing his budget (almost) entirely through spending cuts, grumbling that “I would have preferred an option for deeper domestic spending cuts:”
Balance the U.S. Budget? I Did it in Under a Minute
Indeed, the Times puzzle had lots of pundits talking budget-balancing over the last 24 hours – and from our perspective, that’s a good thing. Even if they do grumble that many of the options don’t seem politically feasible. “Any politician who tried to enact my plan would be carried away by villagers waving pitchforks long before he’d finished reading off the list of tax increases and budget cuts,” wrote Megan McArdle in her Atlantic blog.
In Which I Overbalance the Budget
Economics only goes so far in this debate, anyway, argues Edward L. Glaeser, one of Economix bloggers at the Times. Budget decisions are really about morals:
“A budget reflects two things: broad national priorities and the mechanics that deliver on those priorities. Broad national priorities include the decision to spend on armies or health care or education, and the decision about whether to more heavily tax the rich or the middle class. These choices reflect politics and philosophy more than the economics. Only when those choices are made does economics weigh in.”
Chart of the Day
There are a lot of ways in which the U.S. is different from Europe (their cars are smaller and their coffee is stronger, for a start) but one key element is just how much of their economy goes to taxes:
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Fiscal Future Daily (click here to check out the archive of all editions of FFD) is produced by Public Agenda for Choosing Our Fiscal Future, in partnership with the National Academy of Public Administration and with support by the John D. and Catherine T. MacArthur Foundation. The editor in chief is Scott Bittle, with contributors Francie Grace, David White, Jen Vento, Hart Hooton and Tom Watson.