Debt, austerity, and recovery

Posted Wednesday, May 25, 2011 in Analysis

US National Debt

analysis by Gina Hamilton

WASHINGTON D.C. -- From the statehouse to the White House, we are hearing an awful lot about how much 'pain' is going to be necessary to bring our debt down to managable levels.  Most of the pain, not surprisingly, is scheduled to be borne by those who can least afford it - the poor and seniors on a fixed income. 

To do otherwise - that is, to allow those who can best afford to take a hit to take it - is called 'class warfare' by the leadership of the House, and by the leadership of the Legislature and Blaine House in Augusta.

One has to wonder why asking the upper classes to pay a substantial amount of the debt or the state deficit is class warfare, but requiring the poor, the middle classes, and those on fixed incomes to pay it isn't class warfare.  But that's a story for another day.

Today, we'll examine whether it will actually work, and the consensus so far seems to be that it won't.

Debt trends

A little history, first.  Although the U.S. had public indebtedness after World War II, a rebounding economy caused the national debt to fall dramatically, and it stayed relatively low until the 1980s.  Then, Reagan era tax bracket compression, which lowered income taxes for the weathiest Americans, without corresponding cuts in programs, caused an upward spiral in the national debt. The debt began to fall at the end of the Clinton administration, owing to a balanced budget agreement and pretty strong economy, but additional tax cuts in the Bush administration and unfunded wars and, finally, the recession of 2008 reversed the Clinton trend.

Today, the national debt is greater than the Gross Domestic Product, which is obviously unsustainable.

Austerity

In the United States, the Republican plan to deal with the debt is to attack entitlement programs - Medicare, Social Security, and Medicaid.  Rep. Paul Ryan (R-WI) hoped to change Medicare to a voucher system for everyone aged 55 and under, but his proposal seems to be going over like a lead balloon with constituents all across the country, and in any case, the Senate won't pass this model.  (Nor would President Barack Obama sign it.)  So for now, the Medicare proposal is going nowhere fast.

But the Republicans do have one ace in the hole, so to speak, and that is the fact that the U.S. has reached its debt ceiling on May 16, some $14.3 trillion, and it will need to be raised again so that the government won't be faced with a shutdown.  Right now, the Treasury is paying the bills from funds that should have gone into the federal pension program.  When the debt ceiling is raised, the funds will be paid back to the pension plan.  But that can only go on so long - until fall, when the pension bill also needs to be paid.

The crisis

In order to stay below the debt ceiling, the U.S. would have had to do several things, including raising revenues and trimming spending.  But there are three wars ongoing, none of which are being paid for, and some Bush era tax cuts that should have been rescinded, and ... the first baby boomers about to retire.

There are no prizes for guessing what the crisis is.  Republicans are demanding major spending concessions - all on the backs of the poor, the middle class, and pensioners; Democrats are saying no. 

So while no one likes the idea of raising the debt limit, the truth is that everyone knows that the limit will be raised, and soon, and the solution isn't going to be a happy one for tea partiers who will either be forced into holding their nose and voting for the increase, or who will make themselves irrelevant by voting against and splitting the Republican party.  There just isn't enough discretionary spending in the budget to make a difference.  To avoid a debt ceiling limit increase, one of two things must happen - either there will be tax increases (which the Republicans will reject) or there will be severe cuts to entitlement programs (which the Democrats - and the people - will reject).

In the 1990s, the Republicans also stood firm against the debt ceiling, refusing to pass a budget that didn't include debt reduction, and brought the government to a screeching halt for several months in 1995 and 1996.  However, they also made themselves irrelevant then, too.  Clinton was reelected by a solid margin in 1996, and Republicans lost seats in the House.

Austerity ... EU style

In Europe, austerity plans have been in place for some time, in Greece, Ireland, Portugal, and Spain.  Of all these countries, only Spain is expected to survive without defaulting on its debt.  In the meantime, the amount of pain the average person is experiencing is leading to widespread strikes, demonstrations, and significant hardship.  Ruling parties in most of these countries are expected to lose in upcoming elections.

And the majority of the debt will never be recovered, anyway.  The economies of these countries are not recovering, because they, like us, depend on strong consumerism, the very thing that is immediately and negatively impacted by austerity measures.

A recession, as it turns out, is a very bad time to subject a struggling economy to austerity.  Let's hope that Washington ... and Augusta ... learn from Europe's painful lesson.

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