The Great Fiscal Conundrum
The political class lacks the incentive to do what must be done to avoid calamity.
Our leaders on the left and right have been living in a fantasy world of unlimited spending, bailouts, and money-printing for far too long. The global economy now suffers from the consequences of expert opinion. An elite composed of interventionists, Keynesians, and Modern Monetary Theorists has been whispering into the ears of the powerful since 1913.
Unless Congress, the Executive, and the Federal Reserve cooperate to engineer a miracle recovery, we will be forced to confront harsh reality. Most of the country will have to navigate the coming hard times with little help from Congress or the Central Bank. After all, the interventionist machine has finally begun to sputter and stall.
The U.S. Treasury Department report estimates unfunded liabilities for Social Security and Medicare at $175.3 trillion over the next 75 years.
Total personal debt in the U.S., covering credit cards, mortgages, auto loans, and other consumer liabilities, reached around $17 trillion in early 2023, driven by elevated consumer borrowing and rising interest rates.
Inflation in the U.S. has risen significantly since 2019, accumulating to approximately 17% by the end of 2023—peaking in 2022. Tighter monetary policies have since helped reduce the inflation rate, although it remains above pre-pandemic levels, so aggregate prices have not gone down.
The House Budget Committee statement indicates Social Security and Medicare are on a path to insolvency. Social Security benefits may need to be reduced to about 77% of scheduled amounts by 2040 if no changes are made.
Financial wizards can no longer afford to play parlor tricks and paper over the pathologies. Federal debt now stands at about 130+ percent of GDP, a measure that excludes unfunded liabilities. Matters abroad are worse. Leverage in the world economy is about $300 trillion, while the world’s economic output was only $104 trillion last year.
Defaults could become contagious. Inflation is virtually inevitable.
Once we enter the hard times, there will be one reasonable option: austerity. So-called “free-market fundamentalists” will be vindicated because they never threw out the fundamentals. But few will care. Even assuming so-called fiscally conservative Republicans sweep, taking both houses and the presidency, economic calamity will put Republicans into a bind.
The bind looks like this.
Voters, even those who have moved right, still think the role of government is to help people. But decades of government ‘assistance’ have gotten us into this sorry state, as more than 60 percent of federal outlays are for healthcare and welfare transfers. “Free-market fundamentalists” have always argued that the only way for a people to get wealthy is to create wealth in a system of private property, free prices, profit-or-loss, and sound money.
But again, most voters don’t get this.
Again, most think of the government as the Department of Gimme Gimme, especially in hard times. According to the left-leaning Center for American Progress, a 2021 poll indicates that “American voters want the government to play a strong role in securing basic living standards for all people.” Assuming this poll is in the ballpark, voters will expect more help as matters worsen. If Republicans offer more largess, they risk default, as the Fed will have to print more money.
Printing money causes inflation, and that’s painful, too, as a new generation is learning. (I remember my parents complaining during the Carter Administration.)
If Republicans cut spending, exactly what they need to do, voters will probably turn on them. If Republicans don’t cut much of anything, Americans will stay mired in recession, or worse, and turn on them anyway. The same can be said for Democrats if they win or if there is a divided government.
This is the conundrum.
The only way a Congress and Administration can get us out of this mess is to be straight with voters. Instead of lying and spending, politicians must become standard-bearers of values most people have forgotten: working hard, saving, creating value, and looking out for your neighbor. And they will have to do so at the risk of losing power.'
But they won’t.
We Have to Clean Up the Mess Ourselves
The time has come to confront the stark reality: US federal debt is not just an abstract number on a ledger.
To pull us back from the brink, whoever wins must embrace economic fundamentals and purge the current cadre of experts from the highest echelons of power. The interventionists were hopelessly, disastrously wrong. They should scurry back to their ivory towers in shame and pay a higher price for their broken models and false metaphors.
During the Great Recession, arch-Keynesian Paul Krugman wrote that what drew him to economics was the “beauty of pushing a button to solve problems.” Complex systems don’t have buttons. Imagine an ecologist claiming he could build, fix, or run the Amazon Rainforest. We would be justifiably skeptical. The Amazon is one of the most splendid ecosystems on the planet. Its beauty is matched only by its complexity. No one on earth could design, much less control, the array of biological processes that allow the forest’s fractal order to emerge.
It’s time we were honest with ourselves. Even if this article went more viral than a clip of chopsticks catching a rocket, voters will continue to think the role of government is to help. (Don’t get me started on the corporate interests.) Whether Gen Z continues signing up for debt relief from the Department of Gimme Gimme, the Useless Functionaries of Loudon and Montgomery Counties can be weaned from the teat, or baby boomers blow through what remains of Social Security—something’s got to give. As conditions worsen, voters will feel even more pain. The incentive to turn to their government for help will strengthen.
If the Daddy Party doesn’t help, the Mommy Party will.
But Mommy and Daddy are broke.
Under such pressure, the political class will hit the gas despite coasting on fumes. Americans will have to look to themselves and each other for help. It’ll be hard, but maybe Americans will finally figure out what we should have been doing all along.
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The political class are rent-seeking grifters. They are not motivated to do what must be done now to avoid the inevitable debacle. Austerity is on the horizon.
The government's become the "Department of Gimme Gimme" – That's perfect, Max!
Neither the (Republican?) Daddy Party nor the (Democrat?) Mommy Party can kiss and make it better. The electorate has rejected the abstract lesson, so they will have to learn it on their hides.