US needs to learn from past, beware of debt
By Alexander Pherson
Oct. 20, 2009 9:59 p.m.
If the government’s giddiness to take over the medical profession was not enough to frighten you, then an economic crisis bigger than the current one may succeed in doing so.
After nine months of spending, spending and more spending, the Obama administration will soon have to face the realities of the dreaded morning after ““ and doing so without a mind-altering pill will not be easy or pain-free.
A recent economic boost is providing a grace period. All stock market indexes are way up since their low-points (The Dow Jones Industrial Average has crested above 10,000.), consumer spending has picked up moderately, and we have stopped bleeding job losses ““ all positive events that point to a V-shaped recovery.
Such news is enough to convince many laypeople that programs such as the stimulus package, the Troubled Asset Relief Program and the “cash for clunkers” program are having their desired effects and are helping to save the country from economic ruin ““ even though most of the stimulus has yet to be spent and it is nigh-impossible to prove that any of these things are directly related to the recovery of the economy as a whole.
The billions of dollars the government is spending to produce this fix do not figure nearly as high in people’s minds as they should. According to one of the great soothsayers of economic predictions, the Congressional Budget Office, the federal budget deficit for 2009 alone will be $1.6 trillion or 11.2 percent of gross domestic product ““ the largest deficit share of the economy since World War II.
The CBO predicts that from 2010 to 2019 the deficit will account for 5.2 percent of the total GDP of those years, an optimistic projection assuming a healthy rate of economic growth (3 percent or so), no new spending and no more recessions.
Finally, the government’s own Office of Management and Budget calculates that in 10 years, our deficits will top $9.05 trillion ““ a figure that is agreed upon by both the CBO and the administration.
People who are ready to declare President Obama’s economic policies a success are underestimating how difficult it will be to pay off the debt resulting from these deficits.
While the difficulties of doing this may be concealed in the short term by good quarterly numbers, or by inflated projections of GDP growth, they pose long-term problems that are as fearful as anything we have felt over the past two years.
There are three ways for the government to finance debt ““ borrowing from outside the U.S., raising taxes or printing money. None of these are things we want to contend with.
The first option, borrowing from foreign nations, has already run into problems. The greenback’s growing weakness against the Japanese yen and the European Union’s euro makes other countries very reluctant to purchase our debt ““ especially when the rates of interest on government bonds are expected to remain so low. Rather than risking their fortunes with low-interest Treasury securities, many countries who have been good clients of ours (particularly China) may choose instead to put their faith in American commodities or real estate, which would spell disaster.
The second option, taxation, is not promising either. While he can be heard repeating that we are in the greatest financial crisis since the Great Depression, Obama does not seem to have taken any lessons from that catastrophe.
As economist Arthur B. Laffer explains, it was taxes that sent the U.S. over the edge back then: “Huge federal and state tax increases in 1932 followed the initial decline in the economy. … There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy’s relapse in 1937.”
Laffer goes on to give an encyclopedic description of other tax hikes during this period, concluding: “The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity.”
Obama’s economic advisors should be advised that soaking the rich with taxes is not a solution to our problem. As they have done before, the rich will simply decide to tighten their purse strings or take their business elsewhere when taxes get out of hand. This would stifle growth and harm the economy rather than help it.
The only remaining option, the printing money option, would repeat the very same mistakes we made at the beginning of the crisis.
Thinking that the root of the recession was a liquidity crisis when in fact there was plenty of money sitting around, the government began pumping money by the 10 billion into the system so that now ““ according to Laffer ““ the monetary base has more than doubled. If the feds decide to wed this idea to the challenge of paying off the debt, the result would be staggering inflation, higher interest rates and debt on top of debt.
All of this proves the peril of accumulating debt in the first place. The best thing to do now, besides pray, is try not to get any deeper into this hole. This requires implementing a strategy the Obama administration will find hard to stomach.
First of all, it demands an end to the spending regime ““ meaning no public option and no second stimulus package. Secondly, the Treasury should begin removing the cash from the marketplace to prevent off-the-rails inflation.
Finally, Obama needs to swallow his pride and cancel his plans to raise the top marginal tax rates and cap-gains taxes to protect workers and businesspeople.
If we do all of the above, we may have a fighting chance of saving the dollar, stemming inflation and averting a crisis even more threatening than the last.
E-mail Pherson at [email protected]. Send general comments to [email protected].
