Tuesday 12 December 2017

US enjoys champagne taste on a beer budget and nothing has happened -- yet

Gregg Easterbrook

ACTION by the debt-reduction 'super committee' in the United States is due in less than a week. You will not be surprised to learn the super committee may only announce grandiose goals, while "deferring" specifics to some unspecified future point.

If, after months of hype, the super committee turns out to be a Potemkin committee, taking no action against the tide of government red ink, here is what will happen: Absolutely nothing.

That's why falling arrears on national fiscal policy is so seductive -- in the short term, nothing happens. Greece, Italy, Portugal -- their governments made irresponsible decision after irresponsible decision, and nothing happened. So the irresponsible decisions continued.

America's political leadership can continue to act irresponsibly about money for years to come, and nothing will happen. . . until it's too late.

Consider an analogy to household finances. My wife and I are squares about money.

We borrow conservatively, repay early, plan cautious budgets and won't buy anything unless we know we can cover the cost within a short time.

The result is a nice house that's mostly our own equity, plus retirement savings and a strong credit rating. In fiscal terms, we are pretty much where the US was a quarter century ago.

Suppose I ran out and bought a high-end sports car for me and a diamond brooch for her. This would be irresponsible, especially from the standpoint of our three children. What would happen the next day?

Absolutely nothing. I could break years of rigorous self-discipline about debt and short-term outlook, but pay no penalty at all.

Observing that nothing happened, suppose I then take my wife on a luxury world tour -- first-class flights, presidential suites, Bollinger '75. I could just sign for it, no questions would be asked. What would happen? Absolutely nothing.

I could go on like this for quite a while, overspending without restraint. The sun would continue to rise. It would seem nothing was going wrong -- until my family's finances were ruined. By the time that point had been reached, it would be too late.

In most of its history, the US government has been conservative about debt. The nation had to borrow significantly during the early 1940s, but responded with a strict focus on repaying that debt quickly during the late 1940s and early 1950s.

As recently as the Reagan deficit years of the early 1980s, there was bipartisan consensus that significant borrowing should be a temporary policy only.

In the late 1990s and first two years of the 2000s, the national debt declined as the budget went into surplus and Congress resisted the impulse to overspend.

Then, beginning in fiscal 2003, discipline went out the window. In 2003, the deficit of $378bn was considered shocking at the time -- the worst, in current dollars, since World War II.

Federal deficit

Every year since then, save fiscal 2007, has seen a federal deficit that would have been shocking in any previous decade.

Yet nothing happened! The sun still rises, and other nations still lend the US money.

When Congress and the White House discovered they could borrow recklessly and nothing bad seemed to happen, forbidden fruit had been tasted. Since then, neither Republicans nor Democrats in Washington have shown restraint.

Republicans want lower taxes and more corporate welfare, Democrats want more spending for their party's interest groups. Both sides keep ordering cases of champagne -- and nothing happens. . . in the short-term, that is.

Currently the plan is for trillion-plus annual deficits as far as the eye can see. Even if the super committee achieves its mandate of reducing the deficit by $120bn a year -- a "draconian" reduction equivalent to 3pc of annual federal spending -- the national debt still would be projected to bloat from $14 trillion today to $19.6tn in a decade.

But the White House and Congressional leaders of both parties know that if the super committee fails, nothing will happen right away. Supposedly automatic budget cuts would be triggered.

But they would not take effect until 2013, ensuring that for now, no programme is cut and no tax is increased. Waiter, more Bollinger!

The supposedly mandatory, automatic cuts might later be quietly repealed. Among the most important public policy books of the last decade is 'Reform at Risk: What Happens After Major Policy Changes Are Enacted', by Eric Patashnik of the University of Virginia.

This 2006 book details how Congress enacts what appear to be super-dramatic reforms, but as soon as the media spotlight shifts elsewhere, lobbyists and committee chairs quietly undo the reforms by repealing sentences or paragraphs of the legislation.

Often the repeals are hidden in seemingly innocuous "technical corrections" bills deliberately worded so as to be incomprehensible. The supposedly mandatory super committee spending cuts may disappear in this fashion.

A core reason why Washington keeps borrowing too much, and taxing too little, is that national leaders know that if they behave irresponsibly, in the short term nothing will happen.

In the long term, though, the US will become Greece. At that point, it will be too obvious for Washington to deny what has happened, and it will also be too late to do anything about it. (Reuters)

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