Debt-Driven Crisis Looms Ever Closer

Original Article

A year ago, Congressman Paul Ryan spoke out about Standard & Poor’s having fired a shot across America’s bow, downgrading its coveted AAA rating to a AA-plus. S&P’s rationale for the rating cut was that Congress’ Budget Control Act “fell short of the amount . . . necessary to stabilize the general government debt burden by the middle of the decade.”

For several weeks, pundits and policymakers were jolted out of denial about the assumption that deficit spending could continue in the same trajectory. Congress formed the Joint Select Committee on Deficit Reduction – the Supercommittee – as part of the Budget Control Act. Its mandate was to make recommendations within three months to reduce federal expenditures over 10 years by at least an additional $1.5 trillion, on top of the $917 billion already agreed to, for a total spending reduction of $2.4 trillion, or about $240 billion a year.

Three months passed without agreement by the Supercommittee on any spending cuts. The federal government entered its fourth straight year projecting a $1.25 trillion deficit without the Senate’s passing a budget. In the preceding three years of the Obama administration, the annual deficit averaged $1.34 trillion a year. Previously, in any single year in the country’s history, the worst deficit had been $459 billion – 66 percent lower.

Looking back, when Obama took office in January 2009, the total U.S. government debt stood at about $10 trillion. Now, slightly more than 31/2 years later, more than $5.5 trillion has been added to the national debt. The U.S. debt clock is about to roll over and officially register $16 trillion. This out-of-control spending and debt is the primary reason all three major credit-rating agencies – Moody’s, Fitch, and S&P – now have negative outlooks on U.S. government debt, all but assuring in the near future downgrades and the loss of remaining AAA ratings for the United States.

If credit-rating downgrades are too abstract, the riots and near collapse in Greece and Spain should have infused Washington with a sense of urgency to undertake structural reform of taxes and entitlements, and to make deeper cuts in government spending.

Now, Ryan is Mitt Romney’s running mate, and together, they should remind voters that postponing the day of reckoning on deficit spending is a risk the nation simply can’t afford. It brings us closer to the next financial crisis – a collapse in the government bond market – that would make 2008 look like a cakewalk and forever alter America’s standing in the world.

In fact, a debt-driven collapse of the United States is closer than most Americans realize. Consider what has happened in Spain and Italy – the 12th and eighth largest economies in the world. Just 10 months ago, Spain and Italy carried AA ratings. Today, their debt ratings have plummeted to near junk status, driving their 10-year government- bond yields above 6 percent.

Because the deficit-to-GDP ratio of the United States is worse than that of Spain and Italy, higher funding costs for U.S. debt may come sooner than Federal Reserve Chairman Ben S. Bernanke forecasts. Recession or war would further blow out the deficit and accelerate debt-rating downgrades. Either crisis could cause U.S. debt-service costs to sharply rise and potentially set off a downward spiral, ending in a failed U.S. Treasury auction and a subsequent liquidity crisis. As happened in Greece, and more recently in Spain, the United States could face funding shortfalls that would be solved only by more money-printing, which would risk triggering unacceptable inflation.

Sadly, things are worse today than they were a year ago, when the United States lost its S&P AAA rating. The national debt has grown nearly 11 percent, while the economy has grown only 2 percent. And, over the last four years of various government-spending programs, debt has grown 60 percent, while GDP has grown only 7.7 percent. So much for the benefits of Keynesian stimulus. Washington’s policies have left the country without shock absorbers or an effective insurance policy to counter another crisis.

That is why we have elections. Americans who are likely to vote are better informed, and polls show they are more inclined than ever to cast their ballots for candidates who articulate solutions. Whatever their shortcomings, Romney and Ryan do provide a vision, leadership, and policies that would empower people and rein in government excess. They should go on the offensive and explain how Republican policies promoting private-sector growth, combined with tax and entitlement reform, will repair the nation’s finances and save Social Security, Medicare, and Medicaid for future generations.

Romney has experience creating private-sector jobs, and Ryan has the courage and commitment to get the nation’s fiscal house on a more sustainable path. Voters have a clear choice in November.

Scott S. Powell

Senior Fellow, Center on Wealth and Poverty
Scott Powell has enjoyed a career split between theory and practice with over 25 years of experience as an entrepreneur and rainmaker in several industries. He joins the Discovery Institute after having been a fellow at Stanford’s Hoover Institution for six years and serving as a managing partner at a consulting firm, RemingtonRand. His research and writing has resulted in over 250 published articles on economics, business and regulation. Scott Powell graduated from the University of Chicago with honors (B.A. and M.A.) and received his Ph.D. in political and economic theory from Boston University in 1987, writing his dissertation on the determinants of entrepreneurial activity and economic growth.