America’s out-of-control spending problem

Why are no U.S. leaders willing to tackle the fiscal crisis?
The empire of debt
Pablo Martinez Monsivias/EPA/Keystone press

Standing before Congress and 43 million TV viewers last week for his state of the union address, President Barack Obama reached half a century into the past to convey the challenges facing his country in the future. “This,” he said, “is our generation’s Sputnik moment.” But if the space race, kicked off by Sputnik’s launch in 1957, was the signature challenge of a generation, it’s the rebuilding of American economic might that is the challenge now. And the enemy isn’t the Soviets, it’s the country’s towering mountain of debt: US$14 trillion and counting.

Whether Obama’s speech writers realized it or not, something else quite remarkable happened in 1957 that, while long forgotten, is far more relevant to the debt debate today. That year America balanced its books for the second year in a row. It would mark the last time the U.S. would post back-to-back budget surpluses. Instead, the U.S. has sunk deeper into debt with every passing year, save two rare exceptions: 1961 and 2001, when the dot-com bubble artificially boosted tax revenue that year.

For half a century America has lived far beyond its means. In the same way overextended households, which recklessly used the equity in their homes as ATM machines, finally collapsed under the weight of their mortgages and triggered the Great Recession, the U.S. has mortgaged its future to pay for wars, lavish health care and social security programs, government employee pensions and ever lower taxes. But many economists believe there’s a limit to how long Washington can go on borrowing before it faces a sovereign debt crisis of its own, plunging markets into chaos and triggering a crisis that will make the Great Recession look like a minor stumble. We’re already seeing several heavily indebted U.S. states like Illinois, California and New Jersey pushed to the brink—New Jersey Gov. Chris Christie has talked openly about the state going “bankrupt.”

Now, with a new report from the Congressional Budget Office (CBO) forecasting a deficit of US$1.5 trillion this year, with the sovereign debt crisis infecting pro?igate nations everywhere and with investors talking darkly about the complete collapse of the U.S. dollar, now…finally…could America be ready to deal with its debt crisis?

Would that it were so. Obama managed to make it most of the way through his address before his first mention of the words “debt” or “de?cit” and what he called “the ?nal critical step in winning the future.” His critics said he was effectively relegating America’s fiscal problems to the status of afterthought. He did propose some meagre measures. The government will freeze domestic spending for five years at its current level. That would slice US$400 billion from the deficit over the next decade. Yet one could hardly consider that even a half measure, given the scope of what the U.S. faces over the next decade. By 2021, according to the non-partisan CBO forecast, annual deficits will add up to US$7 trillion, and will likely be closer to US$12 trillion.

Republicans were quick to pounce, but their solutions, for the most part, have been just as hollow. A few days prior to Obama’s speech, House Republicans produced a bill to reduce spending by US$2.5 trillion over the next decade by targeting discretionary spending programs, reducing the federal workforce and axing Amtrak subsidies, among many other cuts. Rep. Ron Paul vowed to kill the Affordable Housing Program, the National Endowment for the Arts, the Corporation for Public Broadcasting and the Consumer Product Safety Commission. It was hard-nosed stuff, yet the types of spending he attacked account for just 20 per cent of the total federal budget, and would do nothing to solve the real fiscal crisis facing America—bloated entitlement programs like Medicare, Medicaid and Social Security. By some estimates, the U.S. has promised to spend between US$150 trillion and US$200 trillion more on social programs than it is capable of paying for.

In the eyes of deficit hawks like Robert Bixby at the Concord Coalition, neither side is taking the debt crisis seriously. “Having a debate over which pieces of the small discretionary spending pie are wasteful is politically safe territory for both parties,” he said. “It allows them to appear fiscally responsible while avoiding the larger issues that might anger their most fervent supporters.” In other words, Republicans get to ignore the need for higher taxes, while Democrats can overlook the need for painful decisions on cherished health care and retirement programs.

Should U.S. legislators need a reason to act, there’s abundant evidence of how quickly unsustainable deficits can spawn into a full-scale collapse. The Harvard University historian Niall Ferguson has detailed how, throughout history, any empire that comes to rely overwhelmingly on lenders to finance its spending programs is doomed. At a speech in Australia last month, he explained how the fall of the Spanish, French, Ottoman and British empires coincided with sharp increases in their debt servicing costs. Take the situation in Spain. In 1543, roughly two-thirds of royal revenue was being eaten up by interest payments on loans the Habsburg monarchy used to finance itself. Within just two decades, interest payments consumed all revenue going to Habsburg Spain, triggering a series of defaults and inflation. “Imperial falls are nearly always associated with fiscal crisis,” said Ferguson. “At some point within the next decade, the U.S. will reach the crossover point at which it will spend more on interest and debt payments than it is able to spend on defence.” The situation will quickly worsen. According to the Concord Coalition, by 2021, interest costs will top US$1 trillion and the U.S. will pay more for its borrowed money that year than it will spend on Medicare, defence or non-defence discretionary programs.

The important thing to understand, Ferguson noted, is that empires don’t gradually decline. Instead, they collapse quite suddenly once foreign lenders perceive a state has become weakened and overextended by its profligacy. Many people think of the decline of the Ottoman Empire as something occurring over generations and ending with the First World War. Ferguson notes that in the span of only 15 years, the share of Turkey’s revenue going to cover the debt jumped from 15 per cent to fully half in 1877, around the time the empire defaulted and began to fall apart. The decline of the British empire can also be seen in terms of a sovereign debt crisis, says Ferguson. By the middle of the 1920s, nearly 45 per cent of every pound London spent went to debt charges. By 1954, the nation owed 21 billion pounds, with 3.4 billion of that owed to foreign lenders—an amount equal to one-third of Britain’s economy. At the end of the war, Britain still thought of itself as a mighty nation, but as the Suez crisis a little over a decade later proved, it could no longer exert its will abroad without the support of the U.S., its biggest creditor. “In a historical perspective, unless something very drastic is done very soon, the U.S. is heading into Hapsburg Spain territory, it is heading into Ottoman Turkey territory, it is heading into postwar Britain territory,” said Ferguson.

Some believe the issue will come to a head in March, when the U.S. national debt bumps up against the debt ceiling. That’s a legislated cap on how high the debt is allowed to rise, and it currently sits at US$14.3 trillion. As of last Friday the debt was just US$211 billion shy of that, according to the National Debt Clock. (It’s been said that in the 62 minutes it took for Obama to give his speech, the debt rose by another US$100 million.) Congress could vote to raise the debt roof, but Republicans have said they may refuse unless Democrats agree to outright spending cuts. But to do so would threaten the ability of the U.S. government to fund itself and could trigger an immediate crisis. The debt ceiling has already been raised more than 70 times since that first Soviet satellite orbited the Earth.

There is hope, however faint. Eugene Steuerle, a fiscal policy expert with the Urban Institute, believes the current political climate may make it impossible for Washington to continue on its destructive fiscal path. “The deficit issue is becoming so big, it’s no longer the 500-lb. gorilla in the corner,” he says. “It’s the 800-lb. gorilla in the middle of the room and it’s becoming harder to ignore.”