The only thing we have to fear, in Paul Krugman’s view, is a Congress without the maturity to deal with the problems posed by the debt we’re incurring now:
Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.
The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?
Be afraid. Be very afraid.
We are more than 70 years removed from the Congress of the 1930’s that he points to. Today’s Congressman is far more likely to view the job as a lifetime appointment, far more likely to be a career politician, far more likely to be a lawyer than his counterpart of 70 years ago would have been. He is less likely ever to have run a business other than a politically-connected one, ever to have made a payroll, or ever to have had lives depend very directly on his leadership.
And the federal government of today already looms four times larger in the country than the federal government of the 1930’s did.
In the end there are only four ways for the federal government to deal with increased indebtedness: higher taxes, lower spending, more economic growth, or inflation. Inflation will hamper the federal government’s further ability to borrow and will injure members of two of the Democratic Party’s core constituencies: the urban poor and those living on fixed incomes. Higher taxes, particularly higher taxes on business where we have among the highest taxes among developed countries, will reduce growth. That’s something that would be very imprudent when your unemployment rate is in double digits.
Will the Congress have the heart to reduce spending? It’s hard to imagine a Congress that’s in the middle of the biggest buying spree in history making a U-turn to rake back all of that lovely spending.
More economic growth is the strongest and least painful tool with which to fight indebtedness. Unfortunately, today’s Congress knows less, if anything, about what leads to greater economic growth than the Congress of 70 years ago did. I can make a suggestion.
It won’t be through greater education or more healthcare. Faster economic growth will come from increased capital spending by businesses, impossible without a solid financial sector and while businesses are holding on for dear life waiting to see what comes next.
James Hamilton points to the blog Political Math which observes, literally, graphically that the problem with comparing 70 years ago to today is that 70 years ago we righted our fiscal ship by cutting spending, defense spending in particular which was by far the largest component of the federal budget. We can’t make up $9 trillion by cutting defense spending. We don’t spend enough on defense for that to be realistic.
What spending can we cut to make up a $9 trillion hole?
Dr. Hamilton concludes:
If the government tries to double taxes on people like me, it’s in real political trouble. If it doesn’t try to double taxes on people like me, it’s in real solvency trouble.
It looks like we may have a problem here.