In the absence of genuine entitlement reform, the United States at some point is going to suffer from a debt crisis.
But red ink is merely a symptom. I used numbers from Greece in this interview to underscore the fact that the real problem is government spending.
The discussion was triggered by comments from the Chairman of the Federal Reserve.
Federal Reserve Chairman Jerome Powell said Wednesday that reducing the federal debt needs to return to the forefront of the agenda, warning that the government’s finances are unsustainable. “I do think that deficits matter and do think it’s not really controversial to say our debt can’t grow faster than our economy indefinitely — and that’s what it’s doing right now,” Powell said.
As I noted in my comments, Powell is right, but he’s focusing on the wrong variable.
The real crisis is that spending is growing faster than the private sector (Powell needs to learn the six principles to guide spending policy).
To be more specific, politicians are violating my Golden Rule.
Spending grew too fast under Bush. It grew too fast under Obama (except for a few years when the “Tea Party” was in the ascendancy). And it’s growing too fast under Trump.
Most worrisome, the burden of spending is expected to grow faster than the private sector far into the future according to the long-run forecast from the Congressional Budget Office.
That doesn’t mean we’ll have a crisis this year or next year. We probably won’t even have a crisis in the next 10 years or 20 years.
But I cited Greek data in the interview to point out that excessive spending eventually does create a major problem.
Here’s the data from International Monetary Fund’s World Economic Outlook database. To make matters simple (I should have done this for the interview as well), I adjusted the numbers for inflation.
So how can America avoid a Greek-style fiscal nightmare?
Simple, just impose a spending cap. At the end of the interview, I added a plug for the very successful system in Switzerland, but I’d also be happy if we copied Hong Kong’s spending cap. Or the Taxpayer Bill of Rights from Colorado.
The bottom line is that spending restraint works and a constitutional spending cap is the best way to achieve permanent fiscal discipline.
P.S. By contrast, proponents of “Modern Monetary Theory” argue governments can finance ever-growing government by printing money. For what it’s worth, nations that have used central banks to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.
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I suppose the only real answer is term limits coupled with a Balanced Budget Amendment. However, congress will never do it.Only we the people via Article 5 of the constitution can make it happen.
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https://invertedlogicblog.wordpress.com/2019/04/07/political-opinions-63-piigs-an-economic-pathology/
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Don’t worry about a Greek style crisis in the US. The only reason Greece has managed to stretch out its insolvency for more than a decade is that they have had the remaining wealthy countries of the EU (now probably just Germany) to rescue them.
There will never be an IMF or World Bank big enough to bail out the US, unless China decides to protect their investment in T-bills by doing so. And I would not expect us to keep our sovereignty if they did.
A better parallel to what is likely to happen to the US if deficit spending doesn’t stop is what happened to most of the countries in Latin America in the last century.
Typical scenario: some market shock causes a lot of unemployment. So parliament enacts welfare. The economy gets worse, a lot of people become unable to pay their taxes, and the treasury starts borrowing to pay its bills. But that doesn’t last very long, because a poor country’s banking system is much smaller than ours, and its ability to lend is soon exhausted. (During the Cold War this phase would be extended as US banks were persuaded to lend to those countries, even though they knew very well they would eventually have to write off the loans when the US subsidies stopped.)
At that point the poor country has two choices: the government can start funding itself by the only means left to them — printing money to the tune of hundreds or thousands of percent inflation per year — or it can let people starve, and put lots of riot police to work cracking down on the predictable unrest.
If the country is at all democratic it will take the first option, and go into an endless spiral of runaway inflation, which will likely never end unless some outsider comes in, kills Allende, and puts in a nasty dictator like Pinochet, who hopefully lasts long enough to allow the economy to rebuild itself. Because there’s no other way for that to happen.
If this scenario were to happen to the US, though, I doubt it would end like that, because I doubt that other countries would keep their hands off once our government is no longer functioning. More likely we would break up the way Germany did in the Thirty Years War, and stay that way for centuries as they did.
Dan, most people don’t seem to grasp this simple concept. Until the people wise up and start to put more pressure on Congress, no action will be taken. Welcome to the new Greece.