Morici: The next fiscal crisis

Peter Morici


With the economy humming along, it’s easy to become cavalier about big federal deficits but when the next recession hits – those could make it a lollapalooza.

As often stated, federal deficits greater than $1 trillion dollars – about 5 percent of GDP – are huge for an economy in the advanced stages of an economic recovery and leave policymakers little latitude to further boost spending when the economy hits a speed bump. As importantly, though, Uncle Sam’s incessant borrowing – just like irresponsible home mortgages in the 2000s – could again send financial institutions barreling over a cliff.

Americans do not save enough to satisfy Uncle Sam’s voracious appetite for credit. To finance the difference, Americans sell foreigners private assets – choice real estate, equities and corporate bonds – and government bonds.

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Already IOUs held by the rest of the world exceed 45 percent of GDP and within the next decade, that figure will surpass 60 percent. No major nation has crossed that threshold without enduring wrenching financial adjustments.

America prints the world’s money – foreign central banks hold Treasuries to back up their currencies, because most international transactions go through the dollar. However, bond markets no longer assign a premium to U.S. government bonds as compared to the securities of other low risk sovereigns like Germany – that indicates international creditors are getting less confident about the U.S. dollar and debt.

As deficits keep soaring, we can expect investors to demand higher and higher interest rates on Treasuries. During the next recession that could well force huge tax increases or draconian budget cuts and send the economy into a death spiral. All that would spin defaults in mortgage and corporate debt, and loan defaults would deal a body blow to major banks.

The recent budget crisis required $300 billion in new spending to get enough Republicans and Democrats to sign on, because neither side was willing to even talk about cutting out the fat in programs that serve their cherished goals – income redistribution for the Democrats and tougher border controls and a stronger military for the Republicans. And both sides love pork – roasted, BBQ or grilled.

In 2017, entitlements and interest payments consumed about two-thirds of all federal revenue, and those are on track to take it all in less than 10 years. One in 20 working aged adults receives a Social Security disability pension – about double the 1990 rate. Millions of adults who choose not to work receive Medicaid, food stamps and other entitlements benefits.

Entitlement outlays could be substantially reduced by more faithful enforcing SSD eligibility rules and imposing work requirements, but Democrats and Republicans from welfare dependent states want no part of it.

As it is currently run, the military needs massive cash infusions for maintenance and modernization, but it is hardly well run for a 21st century labor force and economy.

The 20-year retirement, which mostly applies to officers who do not jump from airplanes or lead personnel on the ground, should be reassessed. Professionals like protocol officers and engineers could be replaced by civilian employees who would not need a military retirement, and reforming military benefits – such as healthcare and commissaries – is strenuously resisted.

Neither party is willing to entertain cuts to programs and departments that have outlived their usefulness. When Secretary Tillerson asserted he can effectively run the State Department with many fewer people, Republican senators went apoplectic.

As the 2018 Trump budget suggested, entities like the Appalachian Regional Commission, 18 other regional commissions and Community Development Block Grants, which permit governors and mayors to dole out patronage without levying taxes on constituents, have long outlived their usefulness but deliver votes to politicians on both sides.

It’s virtually impossible to address those issues with the 60 vote rule in the Senate, House rules permitting the speaker to require bills be backed by a majority of his party before reaching the floor, and both houses having significant caucuses of rigid and uncompromising liberals and conservatives.

Congressional leaders from both parties indicate little interest in changing the rules to force better policy and as we learned during the recent financial crisis, the bond market has a way of imposing tough reforms on recalcitrant politicians.

Americans are not going to like going through Greek austerity but the best glimpse of America’s future may be found by visiting Athens.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. © 2018, The Washington Times, LLC.

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