U.S is headed for a new De­pres­sion

The Washington Times Weekly - - Commentary - By Peter Morici

The Bud­get Con­trol Act of 2011 re­quires the pres­i­dent and Congress to come up with a nine-year, $1.2 tril­lion deficit-re­duc­tion plan by Jan. 1, or an­nual de­fense and non-en­ti­tle­ment pro­grams will be cut au­to­mat­i­cally by $109 bil­lion.

Si­mul­ta­ne­ously, the Ge­orge W. Bush tax cuts — a 2 per­cent­age-point pay­roll-tax re­duc­tion, ex­tended un­em­ploy­ment ben­e­fits and other as­sorted pro­grams — will ex­pire. With­out new leg­is­la­tion, taxes will be in­creased and spend­ing cut by more than $600 bil­lion. A sud­den and mas­sive drop in pri­vate and gov­ern­ment spend­ing surely would tank the econ­omy and send the un­em­ploy­ment rate into the teens.

All con­fi­dence would be lost in Wash­ing­ton’s abil­ity to man­age its fi­nances, bond­hold­ers would aban­don U.S. Trea­sury-is­sued bonds, the Fed­eral Re­serve would be com­pelled to print money to fi­nance the gov­ern­ment and avert de­fault, and U.S. busi­nesses would flee to more promis­ing and bet­ter-man­aged venues in Asia.

A sec­ond Great De­pres­sion would grip the na­tion.

To avert calamity, Pres­i­dent Obama and House Republicans likely will com­pro­mise to raise taxes on high-in­come Amer­i­cans by $100 bil­lion to $150 bil­lion, curb spend­ing an equal amount and re­new the Bush tax cuts for fam­i­lies earn­ing less than $250,000.

This will hardly be enough to right the na­tion’s shaky fi­nances, yet slic­ing the bud­get deficit by as lit­tle as $200 bil­lion or $300 bil­lion still would throw the econ­omy, barely grow­ing at 2 per­cent, into a tail­spin.

Sim­ply put, Amer­i­cans and their econ­omy have be­come ad­dicted to huge fed­eral deficits.

Dur­ing Mr. Bush’s first four years, the trade deficit dou­bled and ul­ti­mately pierced $800 bil­lion, ow­ing to lost com­pet­i­tive­ness with China and ris­ing oil prices. A re­ces­sion should have re­sulted from this lost de­mand for U.S.-made goods and ser­vices.

In­stead, Bei­jing and oil ex­porters stepped up pur­chases of mort­gage-backed bonds and other U.S. se­cu­ri­ties. Aided by cre­ative lend­ing by our na­tion’s banks, Amer­i­cans spent more than they earned and sus­tained the boom into 2007. When bor­row­ers ul­ti­mately de­faulted, the bub­ble burst, and the na­tion was thrust into fi­nan­cial chaos.

A huge trade gap con­tin­ues, but the fed­eral gov­ern­ment is do­ing the bor­row­ing and spend­ing to keep the econ­omy go­ing.

The an­nual bud­get gap has av­er­aged $1.3 tril­lion over the past four years — up from $161 bil­lion in 2007, the year be­fore the fi­nan­cial col­lapse. Spend­ing is up $1 tril­lion — out­lays for So­cial Se­cu­rity, Medi­care and other en­ti­tle­ments have in­creased by more than both the en­tire 2013 bud­get for the Depart­ment of De­fense and ap­pro­pri­a­tions for other civil­ian out­lays.

By 2020, run­away en­ti­tle­ment spend­ing will re­quire com­pletely shut­ting down the mil­i­tary or crip­pling do­mes­tic spend­ing pro­grams and im­pos­ing mas­sive new taxes on the mid­dle class.

With Amer­i­cans liv­ing longer, the so­lu­tion is to raise the So­cial Se­cu­rity re­tire­ment age to 70 and pat­tern U.S. health care af­ter other na­tional sys­tems that bet­ter con­tain costs. For ex­am­ple, the Ger­mans and the Dutch spend one-third less on health care by more ag­gres­sively reg­u­lat­ing prices, ra­tioning care and spend­ing much less on law­suits.

Democrats would have to dis­ap­point or­ga­nized la­bor to push up the re­tire­ment age and dis­ap­point tort lawyers to limit mal­prac­tice and class-ac­tion suits. Nei­ther Mr. Obama nor con­gres­sional Republicans are in­clined to­ward a ma­ture dis­cus­sion about prices and ra­tioning in health care.

Mr. Obama and House Republicans in­di­cate no in­ter­est in con­fronting Chi­nese mer­can­til­ism to ac­com­plish more bal­anced trade with the Mid­dle King­dom. The pres­i­dent re­fuses to rec­og­nize that a bounty of nat­u­ral gas, so­lar pan­els and wind­mills is not enough to ac­com­plish en­ergy in­de­pen­dence. More drilling for oil in the Gulf of Mex­ico, off the At­lantic and Pa­cific coasts and in Alaska is needed, too.

Yet, with­out bet­ter trade and en­ergy poli­cies to boost growth, sig­nif­i­cantly cut­ting the bud­get deficit will in­sti­gate an­other re­ces­sion. Ab­sent rad­i­cal re­forms in en­ti­tle­ment spend­ing, Wash­ing­ton is headed for fi­nan­cial col­lapse by the end of the decade. Peter Morici is an econ­o­mist and pro­fes­sor at the Smith School of Busi­ness at the Univer­sity of Mary­land.

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