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The Conservative Curmudgeon
July 21, 2009

Confronting the Myth of Borrowing Our Way to Solvency
by Allan C. Brownfeld

ALEXANDRIA, VA — Despite President Obama’s $787-billion stimulus plan, the U.S. economy is showing few signs of recovery. The President said in January that unless this plan was adopted, unemployment, then 7.6 percent, would reach 9 percent by 20l0. Now, halfway through 2009, the rate is already 9.5 percent. “Everyone guessed wrong” about the economy, said Vice President Joe Biden.

Both parties seem to share the illusory idea that we can borrow ourselves back into solvency. As bad as the deficit was under President George W. Bush — and in those days Republicans did not display much concern about deficit spending — it will quadruple this year, from $459 billion in 2008 to $l.85 trillion , according to the nonpartisan Congressional Budget Office (CBO). President Obama promises to cut this in half within four years; even if he does, this will still leave the deficit bigger than those for which he once attacked Mr. Bush.

The government’s unfunded liabilities to give elderly persons pensions and health care are equivalent to a debt of $483,000 for every household.

Niall Ferguson, senior fellow at the Hoover Institution and professor of history at Harvard University, notes that, “The delusion that a crisis of excessive debt can be solved by creating more debt is at the heart of the Great Repression.... The U.S. could end up running a deficit of more than l0 percent of GDP this year (adding the cost of the stimulus package to the CBO’s optimistic 8.3 percent forecast). Nor is that all. Last year, the Bush administration committed $7.8 trillion to bailout schemes, in the form of loans, investments, and guarantees.”

How much more toxic waste exists? New York University economist Nouriel Roubini puts U.S. banks’ projected losses from bad loans and securities at $l.8 trillion. Even if this estimate is too high, the banks’ capital will still be wiped out. And this is before any account is taken of the unfunded liabilities of Medicare and Social Security. “With the economy contracting at a fast clip, we are on the eve of a public-debt explosion,” declares Ferguson.

Even The Washington Post, a supporter of the Obama stimulus plan, has expressed concern about our growing deficit: “...the country may be testing the limits of its ability to borrow its way to recovery. Thanks to America’s Triple-A credit rating, the federal government is tapping not only domestic savings but those of the entire world. Still, there is only so much capital to go around. If the U.S. claims an ever-increasing share of the pie, it may have to pay higher interest rates to get it. And higher interest rates would short-circuit economic recovery — thus defeating the purpose of the stimulus.”

In the view of Irwin M. Stelzer, senior fellow and director of the Hudson Institute’s Center for Economic Studies, “...the administration has no credible plan to reduce the deficit to preserve the value of the dollar and to prevent interest rates from rising as wary investors price the risk of inflation into the price they are prepared to pay for government IOUs. Obama long ago abandoned the pretext that his spending plans are merely temporary, aimed at stimulating the economy. They are, instead, commitments to continue spilling red ink on the government books long after the recovery takes hold.”

Huge new spending programs are being introduced at the same time that we have embarked on bailouts of various sectors of our economy — from banking to insurance to automobiles — and have gone deeper into debt to finance the President’s stimulus package. The administration wants to reform American medicine, an extraordinarily difficult challenge at any time. But now, with the country drowning in debt, there is a strong push for a health care bill, such as the one proposed by Senator Ted Kennedy, which the CBO estimates would cost an extra trillion dollars over the coming decade. The CBO figured that Senator Mac Baucus’ version would cost $.6 trillion over the same period. These figures, if past experience is any indication, are far too low.

Instead of embarking upon expensive new programs — without money to pay for them — both Congress and the administration would do well to consider the very real problems we face with Medicare and Social Security. The latest report of the system’s trustees estimates an unfunded liability of $l07 trillion.

Politicians, traditionally, are far more concerned with the next election — not the next generation. For this reason, problems with Social Security and Medicare have been ignored for years — the “third rail” of American politics. When the U.S. introduced Social Security in l935 to prevent poverty in old age, the retirement age was 65 and life expectancy was 62. In l983, a decision was made to raise the official retirement age to 67, but in steps so tiny that the move will not be completed until 2027. Life expectancy at birth in America now averages about 78, so the promise of a pension is worth a great deal more than it was in the l930s.

The notion that we can use huge deficits to borrow our way to prosperity is a dangerous illusion. More likely, as Frank Donatelli, chairman of GOPAC, pointed out in Politico, “If you want to see what President Barack Obama’s America will look like, look no further than California right now. Out-of-control spending, deficits as far as the eye can see, and unsustainable promises to key interest groups have all combined to bring the Golden State to the brink of economic collapse. The governor and the state legislature are struggling to close a budget deficit that has reached $42 billion. The similarities between what Obama wants to do nationally and what California has already done should give Congress pause before it gives the president a blank check to remake our economy.”

The policies of both Republicans and Democrats have brought us to this current moment. It will take more than politics-as-usual to move us in a better, healthier direction. The first step needed is to tell the truth about our real economic problems — something that few leaders in Washington seem prepared to do.

[NOTE TO EDITORS: A shorter version of this column is available for publication. Contact us at fgf@fgfbooks.com if interested.]

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The Conservative Curmudgeon is copyright © 2009 by Allan C. Brownfeld and the Fitzgerald Griffin Foundation. All rights reserved. Editors may use this column if this copyright information is included.

Allan C. Brownfeld is the author of five books, the latest of which is The Revolution Lobby (Council for Inter-American Security). He has been a staff aide to a U.S. Vice President, Members of Congress, and the U.S. Senate Internal Subcommittee.

He is associate editor of The Lincoln Reveiw and a contributing editor to such publications as Human Events, The St. Croix Review, and The Washington Report on Middle East Affairs.

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© 2009 Fitzgerald Griffin Foundation