The U.S. economy is now so broke that it can't be fixed. At least it can't be fixed for any price that Americans will pay voluntarily.
That's no surprise. For a decade, the reigning "conservative" orthodoxy has been that government doesn't have to be paid for. One could cut taxes, run the spending machine full tilt, damn the deficit and grow rich.
At a program last March at the University of South Florida, former Treasury secretary Donald Regan declared that there really are no federal budget deficits -- that's just how the government keeps its books. And even if deficits do exist, he said, they've been good for us.
In previous decades, the government also ran up deficits, but at least we worried about them. In what may be the most dangerous legacy of Reaganomics, an entire generation has grown to adulthood -- and is able to vote -- in the utter certainty that deficits, although endlessly jawed about, don't really matter. And even if they matter, the orthodoxy goes, that's no excuse to raise a person's tax.
"Throughout the 1980s," commented Michael Kinsley in the New Republic last week, our leaders declined "to ask citizens for any sacrifice, however small, for any national purpose, however large." The very idea of sacrifice was banished, along with phrases like "national purpose" or "American community."
So it's hardly surprising that so many voters responded in anger and mistrust when a nervous President (Read-My-Lips) Bush appeared on television with the shocking thought that, "When you get a bill, that bill must be paid. ... Everyone who can should contribute something." Say what?
Contribute something? This time, the president has got it right. But it's going to take reeducation camp to convince a veteran '80s voter that a lower federal deficit is worth even 12 cents on a pack of cigarettes. In the meantime, deficits will grow worse -- because of the recession that's coming on or is already underway. Even if we get a budget agreement that saves in the range of $40 billion this fiscal year, the red ink could easily climb by $300 billion. That might cost an extra $24 billion in interest payments.
Now we've come to the heart of my fear that the economy is so broke it can't be fixed by any budget cuts that Americans will voluntarily accept. Congress has been battling over program cuts in the general area of $20 billion -- $4 billion shy of the potential interest payments on the deficit in 1991. So the cost of the debt may now be climbing faster than federal spending can be reduced.
Any money we chop out of government programs -- this year and in the future -- won't go to reduce the deficit. It will be eaten up by the mounting interest bill on the national debt. Furthermore, it's doubtful that Congress can pass even $20 billion in spending cuts. Those proposed recently set off such a rage among the voters who would lose services or subsidies -- farmers and the elderly, in particular -- that the House backed down.
A decade ago, it was possible to imagine a mix of tax increases and spending cuts that would get American's finances back on track reasonably soon. But no more. Many years of tough adjustments now lie ahead. Because of the deficits, we will face:
Continued high long-term interest rates, because of the shortage of American capital. That will squeeze our ability to borrow and spend.
A weak dollar, because foreign investors are pulling back from financing our deficits. This limits our access to cheap imported consumer goods, makes it easier for U.S. manufacturers to raise prices and promotes inflation.
Poor economic growth, because the government has sucked up the savings that ought to have been invested in the private economy.
It's a high price to pay for the dream that deficits don't matter.