Abstinence at the Orgy
It takes a brave (or maybe a foolish) man to spend billions one minute and then call for fiscal responsibility the next. Barack Obama is that man.
Unless you're in the small minority of economists who doubt man-made climate change and think the government should do nothing in the current economic catastrophe, you want more spending. Now. A lot of it.
Forget all the talk about thrift and budgetary restraint and entitlement reform. You know that for the economy to get going, the feds need to spend because, hey, no one else will.
When people are hunkered down, the government has to step up. There may have been a debate about what kind of stimulus bill to pass earlier this month, but there was no debating that we needed something.
And yet...at some point the recession/depression will end and we'll be faced with not only the incredible debts we had before this mess, but all the money we borrowed to pay for the recovery.
The sums are so staggering that you kind of want to get up and get a stiff drink, both to steady yourself and because the statistics are so mind-numbing they're hard to understand.
Look at it this way. The United States has a GDP of more than $14 trillion. Before all this bailout mess started, we had national debt of about $11 trillion. But that number is low because we have something like $56 trillion in national debt and unfunded liabilities, money we've promised the baby boomers in Medicare and Medicaid mostly (Social Security has a shortfall but it's small by comparison). And we've just tacked on another $9.7 trillion in guarantees from the Federal Reserve and the federal government. At some point, a truly monstrous bill will come due.
That's part of the reason why the White House isn't crazy to schedule a fiscal responsibility summit and why there will be so much interest in the president's budget address to the nation tomorrow along with the release of his first budget on Thursday. Right now we're in a frenzy of spending, but it won't always be this way. Thinking about what we could do now to lessen the impact of what's to come later, well, that's not crazy even if having a responsible money summit in the midst of a spending spree is like teaching abstinence education at an orgy.
Today's summit will include the likes of Pete Peterson, who pledged a billion dollars of the money he made at Blackstone to a foundation aimed primarily at restoring thrift to the federal government and citizenry. If we really can reform Medicare and Medicaid and get some real savings into the health care system it will save us a lot of pain later. One thing we should not get distracted by is Social Security. The system is actually pretty sound and efforts to privatize it are likely to cause more heartache than not. Imagine if George W. Bush had gotten his way and Social Security had been partially privatized. In this market? Eeek!
This week, we'll see if the fiscal discipline side of Obama's brain is working. Will he come up with innovative solutions to make the day of reckoning better than it could be? Will he, as he promised during the campaign, eliminate programs that aren't working? Putting a stake through the heart of the V-22 Osprey, an aircraft so bad that Dick Cheney tried to kill it repeatedly when he was Defense secretary, might be a good place to start.
We got an early preview of the budget over the weekend. Obama's fiscal blueprint envisions the deficit declining from close to 10 percent of GDP to about 3 percent by the end of his term. It's an ambitious goal, but given the economy-and given the track record of recent presidents-it's a target the nation's 44th chief executive is likely to miss.
So if we don't pay off the debt, what happens? More than likely, as Michael Kinsley and others have noted, is that we will have a period of severe inflation. Inflation would make it easier to pay down the debt because the dollar becomes so much cheaper. "Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt-public and private, U.S. bonds and jumbo mortgages-in half," Kinsley notes.
Of course anyone who lived through the inflation of the 1970s, as I did, doesn't want to go back to that. Though I was but a wee lad at the time, it's hard to forget things like the "meat boycott" where grocery shoppers attempted to reign in the soaring price of meat by avoiding it. Inflation is a wealth-destroying phenomenon, but it may be the way the nation finally writes down a lot of this debt. I'm not saying that would be a happy ending, but at least it would be a conclusion.
Let's hope that doesn't happen. Let's hope Barack Obama can do two things at once that are seemingly contradictory-saving while spending, and preparing for austerity while being profligate-to forestall something much worse.
Austerity and hyper-spending sounds odd-well, like teaching abstinence at an orgy-but these are odd times.VisitÂ Portfolio.comÂ for the latest business news and opinion, executive profiles and careers.Â Portfolio.com© 2007 Condé Nast Inc. All rights reserved.
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