U.S. Government: Running Out of Economic Options?

In my earlier post, "Declining Empire, Banana Republic, or Failed State?" the commentators I quoted cited America's profligate ways and growing dependence on borrowed money, especially from lenders based overseas, as one reason for pessimism about our current and future standing. In "Our Drunken Uncle" Investor's Business Daily adds to concerns about the destructive path our nation is on:

Spending: According to two separate Government Accountability Office scenarios, America's long-term fiscal outlook is "unsustainable." No surprise, since Uncle Sam is spending like a drunken sailor.

The GAO, Congress' in-house think tank, warns that in "little over 10 years, debt held by the public as a percent of GDP" will hit a record high, exceeding the debt-to-GDP ratio seen after World War II. Then it will "grow at a steady rate thereafter," according to the government forecasters.

"Social Security cash surpluses, which have been used to help finance other government activities, are projected to turn to cash deficits by 2016," the GAO warns.

But it is not just those who lean to the right who are worried about the consequences of excessive spending and borrowing, ostensibly in the name of returning things to "normal." Whatever the failings of the rating agencies, which includes the fact that they enabled many of the excesses that helped create the mess we are in today, they still know a bit more than most people about evaluating creditworthiness. With that in mind, the following report from Reuters, "Reducing Deficit Key to US Rating: Moody's," (MCO) suggests the fiscal train wreck now in motion is more than just a Republican talking point:

The United States, which posted a record deficit in the last fiscal year, may lose its Aaa-rating if it does not reduce the gap to manageable levels in the next 3-4 years, Moody's Investors Service said on Thursday.

The U.S. government posted a deficit of $1.417 trillion in the year ended Sept. 30 as the deep recession and a series of bank rescues cut a gaping hole in its public finances.

The White House has forecast deficits of more than $1 trillion through fiscal 2011.

"The Aaa rating of the U.S. is not guaranteed," said Steven Hess, Moody's lead analyst for the United States said in an interview with Reuters Television. "So if they don't get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy."

That said, while efforts to boost revenues won't go down well, harsh fiscal realities -- and a quick read of history -- suggest that it won't be long before the urge to raise taxes becomes overwhelming and widespread. One look at the following chart, included in a June Clusterstock post, "Look What Happens To Tax Rates When Debt And Deficits Balloon," and it's hard not to concede that Washington will be looking to garner a bigger share of what people earn to compensate for a yawning gap.

In the meantime, despite the inevitable public uproar, those who run the country will also be forced to slash spending however they can, which may be even more problematic than boosting taxes given that some of the biggest beneficiaries of government largesse (e.g., the elderly) are a political force to be reckoned with. Nonetheless, it probably won't be long before we start seeing "studies" and other such efforts like the one detailed by Britain's BBC News in "Call to End Middle Class Benefits":

Benefits for the middle classes should be taken away to avoid higher taxes, a centre-right think tank has suggested.

Reform says payments including maternity pay, child benefit, the winter fuel allowance and TV licences for the elderly could be scrapped.

It says the UK spends £31bn a year on such benefits, equivalent to an extra 8 pence on the basic rate of income tax.

In a report, it also argues that flexible savings accounts should be set up to replace pension contributions.

Chancellor Alistair Darling has predicted that public borrowing will reach a record £175bn next year.

Yet even if attempts to boost revenues and cut expenses prove somewhat successful, the sheer scale of the fiscal holes now opening up, as well as the political and social costs associated with trying to fill them in, suggest that our government will ultimately have little choice but to go down the the same road that many of our similarly constrained predecessors did -- that is, inflating their way out of it.

Comments

[Tony Petroski:]

Mr. Panzner, We'll get through this.

As my late dad used to say, "don't let it spoil your day."

Oct 23 10:26 AM

[Dave Wrixon:]

The problem is that your late dad probably never witnessed problems on this scale. Even in the 1930s there was never such an over-hang of debt. Personally, I think the US will end up having to scrap the dollar altogether and start with a new currency, just as many other nations have in the past. That has never happened before but unless things change and change rapidly there will be no alternative.


On Oct 23 10:26 AM Tony Petroski wrote:

> Mr. Panzner, We'll get through this.
>
> As my late dad used to say, "don't let it spoil your day."

Oct 23 11:48 AM

[User 353732:]

THe US Regime has and with enthusiasm is pursuing 3 sets of options in parallel:
1. The Criminal (enrich the WashDc-Wall ST -Big Media axis of corruption and its clients, cronies and families while impoverishing everyone else)

2.The Stupid ( starve wealth, job and income creating businesses of credit while engorging a dozen strategically bankrupt wealth, jobs and income destroying financial and industrial monsters with limitless amounts of free liquidity)

3. The Incompetent( every day the list grows: regulations without wit or benefits, only costs; cascading waste of public monies; )

What the Regime has not tried and will not try as long as it has despotic and venomous control is the Correct set of options( Less Government, more freedom; less Wall St and more Main st; fewer penalties and more incentives for the Productive Economy; credit allocation based on worthiness instead of political favoritism; credit costs based on risk not fiat scrip; fewer Edicts and Diktats and more respect for the Constitution; far fewer bureaucrats and many more entrepreneurs).

Americans are not running out of options but unless they purge the US Regime and reclaim the Nation they will be out of options, out of jobs, out of security and out of liberty.

Oct 23 12:02 PM

[j-dub:]

Your late father was a wise man who believed in his country and its potential.

I believe, however, that exact ideology is what has got us into the mess, in the first place;the unwavering belief that the US is above it all and that our initial ingenuity and exceptionalism will continue to be a perpetual RIGHT of ours no matter the circumstances.
We are now one world that could not be envisioned fifty or sixty years ago by our elders. We have up and comers that thrive to have their own piece of exceptionalism, their own brand of ingenuity.
Our misguided belief that the US can not be dethroned is slowly seeping OUT OF the minds of many Americans. Our wake up call was when Lexus put Cadillac into a coma back in the late eighties/early nineties. Americans must now come to the sobering reality that we are indeed a lame duck waiting for the inauguration of a new world power. We have sowed our own seeds of "destruction," replicating most empires before ours.
It is not the end of the world, but it is reality.


On Oct 23 10:26 AM Tony Petroski wrote:

> Mr. Panzner, We'll get through this.
>
> As my late dad used to say, "don't let it spoil your day."

Oct 23 12:42 PM

[debtacid:]

Well, at least we have a brand new alternative to the obsolete U.S. government:
www.youtube.com/watch?...

Oct 23 02:32 PM

[WOT:]

I agree. I look forward to the issuance of the new currency, or the "More Better Dollar", one day soon when they have to wipe a series of zeroes off the old currency.


On Oct 23 11:48 AM Dave Wrixon wrote:

> The problem is that your late dad probably never witnessed problems
> on this scale. Even in the 1930s there was never such an over-hang
> of debt. Personally, I think the US will end up having to scrap the
> dollar altogether and start with a new currency, just as many other
> nations have in the past. That has never happened before but unless
> things change and change rapidly there will be no alternative.<br/>

Oct 23 06:15 PM

[The Geoffster:]

Nancy Pelosi can't wait for the Bush tax cuts to expire. She needs more money to pour down the drain. I don't think she'll be happy until everyone comes to Washington begging for a handout.

Oct 23 07:34 PM

[MarkitWacha:]

Pelosi has a 30% approval rating. enough said.

This article is about economic options, so here's some:

Freedom to freely drill and use natural gas would be the catalyst to end this recession/depression.

Cap-and-tax with 'redistribution' (Waxman's folly) would extend the depression to critical levels. Meaning, people will get hurt when they steal out of starvation. Axe it, as it is unnecessary, and the national gasoline tax could be expanded to replace income tax instead with more efficient results.

Economically, the only part of the economy that would boost productivity sufficiently to return us to good times is the energy sector. Energy is a huge cost, after rent. Improvements in the cost of oil, the efficiency of an internal combustion engine (check out Ford's direct injection 1.4 L engines), production of electricity, etc. could boost the economy by a trillion per year, at the expense of enemies in the middle east.

Oct 24 05:26 PM