An Intractable Fiscal Problem - by David Rosenberg (The Massive, Snowballing Debt Bulge)

An Intractable Fiscal Problem

by David Rosenberg

Even with low interest rates, the massive debt bulge has become so large that interest charges on the public debt are within 3 years of absorbing over 30% of the revenue base, which then makes it that much tougher to reverse course. 

In other words, the fiscal problem is becoming increasingly structural and we are already at the stage where even if the economy were running flat out at full employment, the deficit would still be over 7% relative to GDP. At some point, this will begin to impede economic progress.

When you add up the entitlement programs, you know — the ones you can’t cut back on, and interest payments on the grotesque debt load, we have 65% of total government spending that can’t be touched. 

In the next decade, under status quo policies, this “mandatory” share of the spending pie goes to 72%. Tack on the defense budget, my friends, and we are up to 88% of federal government outlays that are next to impossible to reverse. 

So tell me — we are going to reverse this seemingly intractable run up in the public debt to GDP ratio by slicing 12% of the spending pie that is discretionary? It won’t be enough, even if all that 12% remainder ‘pork and barrel’ spending were eliminated altogether.

So guess what the future holds … higher taxes: very likely a national sales tax. It works in Europe. It has also worked in Canada. Japan is planning to double its national sales tax from 5% to deal with its fiscal challenge. 

It stands to reason that a federal consumption tax will have to be part and parcel of any U.S. strategy to solve what is increasingly becoming an intractable budgetary deficit.

Indeed, while many a Keynesian will point to the need for a government-led demand boost, the problem is that when the deficits and debts become structural, what is known as the “Ricardian Equivalence” sets in and this means that the fiscal stimulus does more harm than good for the economy.

Unfortunately, while the bailouts saved insolvent banks (oh, we’re not Japan at all) the stimulus from this Administration involved a series of short-term quick fixes that provided no long-term multiplier impact. At least FDR put people to work — not merely to pay them to be idle. At least Eisenhower built highways -- with a long-run payback.

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An Intractable Fiscal Problem - by David Rosenberg