One reason it will be so difficult for Congress to balance the budget is left-of-center intransigence over cutting domestic spending and entitlements. (Right-of-center politicians are intransigent about some issues, too, but this column isn't about them.) One reason that deficit doves persist in the delusion that things really aren't so bad is that a cadre of pundits works assiduously to persuade them that budget hawks are in the grip of "deficit hysteria." Among the more influential is Ezra Klein, Washington Post blogger and habitué of MSNBC cable news shows.
Klein, a cheerleader for the Obama administration's relentless expansion of government, retains a touching faith in the blessings of the leviathan state, although he does have to work a bit harder these days to maintain his optimism. Worry over the size and intractability of U.S. deficits is only partly the result of "deficit fear mongering," he concedes. There is legitimate reason for concern. But there also are reasons, he insisted in a blog post yesterday, to take heart. He lists three.
The market isn't worried -- yet. How bad can the problem be if interest rates remain so low? "The government can sell a 10-year bond with a 2.54 percent interest rate right now," he writes. "When George W. Bush entered office, that was 5.16 percent. When Bill Clinton took charge, it was 6.6 percent. When George H.W. Bush said the oath, it was 9.09 percent."
Implicit in this argument is that interest rates will remain low forever, or at least a very long time. But when the national debt is nearly $14 million and on its way to more than $20 billion by 2020 (President Obama's forecast), it is extraordinarily sensitive to increases in interest rates. If yields on 10-year Treasury securities climb to 10% by the end of the decade, as some analysts think they could, annual deficits would reach $2.8 billion annually and the national debt $36 trillion, according to calculations performed by Chmura Economics & Analytics, a Richmond, Virginia, economic consulting firm.
What could bring about such a surge in interest rates? Gee, let me count the ways. A pick-up in economic growth (as unlikely as that now appears)... a demographically induced decline in global savings... Higher inflation... Sovereign debt contagion leaping from Europe to the U.S... Sovereign debt contagion leaping from a defaulting Illinois or California to the U.S...
We're the only game in town. Klein acknowledges that markets could turn on us, but where would investors go? "They need to find government debt that's safer than ours," he says. "The natural choice would've been Europe, but the continent is a fiscal basket case. Japan's economy is worse than ours. And China? Riskless? You have to be kidding me."
Right now, American debt still looks safe.Come back to me in 10 years when, if we haven't dealt with our budgetary problems, the value of the dollar is plunging, interest rates have hit 8% to 10% and the national debt has passed the $25 trillion mark. Where else could investors put their money? How about AAA-rated corporate bonds? How about gold and silver? How about a basket of Deutschmarks, Swiss franks and other sound currencies that could well replace the euro? How about petroleum reserves, securitized farmland, synthetic hedged widget futures or whatever wild asset category the Wall Street conjurers dump on an unsuspecting public? If investors don't trust the U.S. government to repay its debts, trust me, they'll find somewhere else to put their money, even if it's not as risk-free as they would like.
Debt hasn't gone up by as much as you think. Sure, government debt has gone up, but private debt has plummeted in recent years. Writes Klein: "The total amount of American debt that the global capital markets are being asked to absorb, in other words, has not changed by nearly as much as people think."
Huh? This is silliness. The global supply and demand for capital may affect interest rates (in fact, I argue that declining saving rates will push interest rates higher over the decade) but they say nothing about the creditworthiness of the U.S. government. If investors perceive the federal government as a poor risk for repaying its debts, they won't cut Uncle Sam any slack just because they think U.S. businesses and consumers have become better credit risks.
The only reason for optimism is the one that Klein cites in his final paragraph: the prospect that Congress may cut a series of small deals like the deficit-reduction bills enacted in the 1990s. In other words, the situation warrants a degree of optimism because Congress may come to its senses and reverse its ruinous course. But Congressmen will never muster the political will to make those painful changes if they heed Ezra Klein.