Sustainability or Not
by Michael S. Lubell, APS Director of Public Affairs
Performing without a safety net became the trademark of the Flying Wallendas, who debuted their unplanned “netless” high-wire act in Madison Square Garden in front of an awestruck New York audience in 1928. Now, 81 years later and 204 miles further south, the Obama White House is trying to edge its way across another yawning void, and its audience is the entire world.
With the House of Representatives having cleared healthcare legislation and the Senate pursuing its predictably erratic and isolated course, the President is finally beginning to focus on sustainability. It isn’t climate change –as important as it may be–that has captured his attention. It’s the fiscal balancing act he must perform, if our nation and the world are to avoid a devastating fall.
A few quick numbers tell the story. The national debt shortly will surpass $12 trillion, just about equal to the gross domestic product. And unless we mend our ways, we will soon exceed the peak debt to GDP ratio of 121 percent that was part of our World War Two legacy.
Equally alarming today, foreign nations own more than a quarter of our national debt. China alone holds $800 billion of Treasury obligations, and Japan carries $750 billion on its books.
Having China as a primary creditor has its consequences, not all of them benign. In October, the Dalai Lama, Tibet’s spiritual leader, visited Washington but didn’t find the White House welcome mat put out for him. It was the first time in twenty years that an American president refused to meet with the Tibetan Nobel Peace Laureate, since he began making pilgrimages to the banks of the Potomac.
Administration representatives admitted that the snub was intended to curry favor with China, which has been increasingly at odds with Tibet. The lesson is clear: Don’t cross your principal creditor if you’re not prepared to declare bankruptcy.
I know no economists who believe that our current path will lead to any promised land, spiritual or otherwise. From the far right to the far left they all say that we must radically reduce deficit spending as soon as our economy has recovered.
William Galston, a senior fellow at the Brookings Institution, a former domestic policy advisor to President Bill Clinton and an unabashed liberal, testified before the Senate Budget Committee in early November. He put it this way:
“Regardless of party, ideology, or branch of government, almost no one in possession of the facts believes that our current fiscal course is sustainable. The level of deficits, debt, and borrowing from abroad projected for the next decade threatens not only our economic prosperity but also our currency, our global leadership, and our national independence. As soon as our economy emerges from recession and the job market improves, we must adopt a new fiscal strategy, and the planning needed to craft and implement it should begin without delay.”
Galston has been around Washington long enough to know that the political deck is stacked against long-term rationality, especially when it comes to reducing spending and increasing taxes, both of which will have to be part of the fiscal solution. Democrats cringe at the former, and Republicans reflexively reject the latter.
That’s why Galston and several moderates in the House and Senate are urging the formation of a bipartisan commission to provide a path forward. Without it, they say, politics will trump policy, and no compromise will be found And that, they submit, is a prescription for disaster.
Even Keynesians, who promoted the stimulus bill as a key to forestalling an economic collapse earlier this year, accept the need for a debt remedy. They acknowledge that $1 trillion of annual federal spending will have little impact on long-term economic growth. The discretionary federal budget is simply too small to play a major role on the national economic stage. Although federal spending cannot contribute substantially to economic growth, out-of-control deficits, they note, can cripple it.
President Obama’s economic advisors have long counseled that once the banking system and the economy regain their equilibrium, the White House must rein in spending. For now, White House counselors say publicly that the President remains committed to his ten-year plan to double the physical science budgets. But privately, they caution that their high-wire act is a tough one, at least as dangerous as the one featuring the Flying Wallendas.