While the eyes of the nation were riveted last week on the news that American combat deaths in Iraq had passed the 1,000 mark, a far more frightening statistic was released with far less fanfare. The federal budget deficit hit a record $422 billion for the first nine months of 2004, according to the nonpartisan Congressional Budget Office. By year’s end the deficit will top $560 billion, setting a record for a second year in a row.
The Bush administration tried to put on a happy face, noting that the deficit had actually come in $56 billion below the administration’s own forecasts from the beginning of the year. But those original forecasts were exaggerations, meant only to mask the extent of the inevitable calamity. Now the Congressional Budget Office has stripped off the mask.
According to the budget office, cumulative deficits over the next 10 years will come to $2.3 trillion at current rates of taxing and spending. In fact, that’s wildly optimistic. It assumes that the economy will grow at an unrealistic 4.5% per year and that the Bush tax cuts will be allowed to expire in 2011, as currently scheduled. If the tax cuts are made permanent, as the president and his congressional allies have promised, the accumulated debt will double. If more tax cuts are added in a second Bush term, as he has hinted, the sky’s the limit.
This isn’t merely a matter of fiscal responsibility, nor is it just a question of economic and social priorities. The bigger issue is the mortgaging of America’s future to foreign lenders.
Right now, a steadily increasing share of our growing national debt is being bought up by a handful of foreign governments, not all of them friendly. Like any other debtor nation, America will eventually face restrictions on its freedom of action. The day will come, sooner than most of us realize, when our creditors will demand a say in our policies both at home and abroad. When that day comes, those who support the current administration because they think it keeps America strong and independent — and guarantees Israel’s safety — will have a lot of explaining to do.
There was a time — a decade or so back, when the deficit was merely unsustainable — when debt was discussed mainly as a matter of moral character. Grumpy old men like Ross Perot and the Concord Coalition used to tell us it was unseemly to live beyond our means. Bill Clinton listened, and the nation started to reverse course. Now we’ve switched back.
These days, with the red ink surging to biblical proportions, the discussion is shifting from our nation’s character to its future. Most of the time, that means anxious nattering about the solvency of Social Security and Medicare. Federal Reserve chief Alan Greenspan spoke for a growing consensus among economic wise men when he told Congress last week that “with the baby boomers starting to retire in a few years,” the government’s safety nets face a looming crisis. We must cut welfare or Social Security or both.
This newspaper has argued before that the national fixation on Social Security as the key to the budget mess is misguided. Social Security has its own revenue stream, the so-called payroll tax, a deeply regressive levy that more than covers its own needs. It’s the rest of the government — highways, forests, welfare and the ever-growing military budget — that’s in the red. The only reason that Social Security looks shaky is because of a Vietnam-era accounting trick that folded the retirement fund into the overall federal budget to hide the costs of that war.
The fact is that President Bush’s tax cuts, the main cause of today’s deficit — with help from the slow economy and the unbudgeted costs of the Iraq war — are cutting into the funds that should be paying for current needs. Diverting tomorrow’s pensions to pay for today’s bombs is little more than theft. Indeed, that may be the point of the cuts, as former Clinton White House budget director Jack Lew suggests in his Page 1 interview with E.J. Kessler.
None of this should surprise us. Greenspan has been calling for cuts in Social Security for decades, in good times and bad. It’s a reflection of his life-long philosophical disdain for the welfare state. Bush, too, has made it plain that he favors getting the government out of the business of caring for the poor, sick and aging. He calls it the “ownership society.” We call it greed.
But all this is quibbling compared with the real deficit crisis that the wise men don’t want to discuss: the mounting national debt and the growing role of foreign lenders.
When government spends more than it earns, it borrows the difference. With our national savings rate at a piddling 2%, a growing proportion of the money we’re spending comes from foreign lenders. The biggest players these days are a handful of foreign governments, mainly the central banks of England, Japan and, increasingly, the fast-rising powerhouse of Communist China.
Twenty-four years ago, when Ronald Reagan took office, the federal debt — the total of all red ink accumulated since George Washington’s time — was about $930 billion. Eight years later, after two terms of tax cuts and military build-up, the debt had nearly tripled to $2.6 trillion. America had turned from the world’s largest creditor into the world’s largest debtor.
Today the debt stands at about $7.4 trillion. Nearly one-fourth, or $1.7 trillion, is owed to foreign lenders.
No one but the most starry-eyed administration boosters thinks this level of borrowing can be sustained indefinitely. Sooner or later, our over-mortgaged economy will start to look like a bad bet, and our creditors will start calling in their loans. The question is not if, but when and how.
There’s a precedent. Great Britain, the world’s imperial power throughout the 19th century, was a debtor nation by the end of World War I. America had replaced it as the main economic engine, but was reluctant to play empire and so continued financing London’s pretensions into the 1950s. The break came in 1956, when President Eisenhower, infuriated by the British-French-Israeli attack on Sinai, decided to crash the pound. Britain spent the next 30 years clawing its way back to second-class status.
How America’s creditors handle our coming insolvency — and it is coming, unless we change course — will depend partly on whether and how well we’ve prepared, and partly on our overall standing in the world community. In the worst case, the lenders might crash the dollar and plunge us into crisis. In the best case, we can enter a lengthy round of negotiations aimed at restructuring our economy or such other concessions as our creditors see fit to demand.
What will they seek? It might be more beef in our cheeseburgers, more Seinfeld reruns or a change in the Mets starting lineup. Or it just might be a change in our Middle East policies, which appear more and more to be the main point of contention between us and the rest of the world.
None of this is inevitable. To change the outcome, however, requires a leadership that is willing to acknowledge the dangers in our current budget priorities.
This season of repentance is as good a time as any to start rethinking, before it’s too late.
The Forward wishes its readers an easy fast, and a thoughtful one.