A distinguished group of Republican economists and former economic policymakers, led by George P. Shultz, recently wrote a significant warning to the American people: There is a limit to how much debt the U.S. government can take on.
In The Wall Street Journal, the group talked about the rising level of the debt, “an unprecedented string of federal budget deficits,” although they noted that the deficit is trending down a little bit — maybe $100 billion less than last year.
Small comfort, that, when the deficit is likely to be $1.2 trillion. And the significance of the burgeoning national debt, they said, is that it is financed by short-term borrowing by the Treasury. On the upside, that money is almost interest-free right now; in a slow global economy, people are in real terms paying the U.S. government to hold on to their money.
What happens when that situation changes?
In today’s tea party politics of the GOP, a name one does not often see evoked is that of Alexander Hamilton, the founder of the Treasury. Hamilton is seen as the Wall Street founder to many grass-roots party activists who idolize his political foe, Thomas Jefferson.
As the Shultz group noted, however, Hamilton saw that the issuance of debt is one of the fundamental powers of a nation-state and one that prudent financial management is necessary to preserve.
Hamilton bound the new union together with the national debt, and his successors borrowed to preserve the Union 150 years ago, and more recently to defeat Hitler and Stalin in the 20th century. Today,the Shultz group said, “government officials are issuing debt to finance pet projects and payoffs to interest groups, not some vital, let alone existential national purpose.”
This may not be entirely fair, since government expenditures also blossom to pay for millions to get vital assistance during times of high unemployment. That’s a big hangover in terms of the debt from the years of former President George W. Bush — who goes entirely unnamed in the long Journal article.
Still, the article very usefully notes that the idea that taxing upper-income taxpayers does not pay all the bills.
“Worse, the unfunded, long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary,” the Shultz group argued.
As grim as is this prognosis, the authors completely ignore the impact of the Bush-era tax cuts in fueling today’s debt crisis. Nor is there a word — not a word — about the absurd contention of GOP nominee Mitt Romney that the government can now afford to slash tax rates for rich and poor by 20 percent.
All this does not add up. It’s as if the authors are horrified at the trillions in debt but cannot bring themselves to endorse a policy that is rejected by their party: Significant tax increases as well as significant budget cuts. Both will be needed to get such a huge deficit problem under control, much less start to pay off the debt.
The risks are certainly real: “We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever,” the Shultz group wrote. “We risk eventually losing the privilege and great benefit of lower interest rates from the dollar’s role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.”
Very true, but one that requires leaders of both parties to ignore politics and put together a budget deal that raises revenue as well as cuts expenditures. Depending on the outcome of the elections, key Louisiana legislators — particularly U.S. Sen. Mary Landrieu, a Democratic moderate, and several House members on key committees, such as Appropriations and Ways and Means — will have to find the wisdom to make such a deal in the interests of heading off the crisis predicted by Shultz and his colleagues.
Are we yet at the point of no return?
Adam Smith, a contemporary of Alexander Hamilton, was a pretty good analyst of economics as well as human nature. A friend was frantic in the street in Edinburgh after news of the American victory at Saratoga. It is the ruin the nation, the alarmed friend cried.
“There is,” Smith said dryly, “a great deal of ruin in a nation.” So there is, if the nation is willing to use its strengths to overcome its weaknesses.