Paul Krugman observes that, were the U.S. a developing country, we’d be raising a lot of eyebrows with our huge budget and trade deficits. He correctly notes, though, that we’re not a Third World country and that people will continue to loan us money because, well, we can obviously afford to pay.
But, then, this rather strange ender:
Still, there’s no question that the U.S. has the resources to climb out of its financial hole. The question is whether it has the political will.
There is now a huge structural gap — that is, a gap that won’t go away even if the economy recovers — between U.S. spending and revenue. For the time being, borrowing can fill that gap. But eventually there must be either a large tax increase or major cuts in popular programs. If our political system can’t bring itself to choose one alternative or the other — and so far the commander in chief refuses even to admit that we have a problem — we will eventually face a nasty financial crisis.
The crisis won’t come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out.
But at a certain point we’ll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge.
What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government’s access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.
I know: it all sounds unbelievable. But would you have believed, three years ago, that the U.S. budget would plunge so quickly from a record surplus to a record deficit? And would you have believed that, confronted with that plunge, our leaders would offer excuses rather than solutions?
Actually, one would think anyone vaguely familiar with politics would have predicted precisely that reaction. And, of course, one wonders what the alternative public policy would be? Raising taxes during a recession? Banning imports so that consumers would pay more for overpriced U.S. goods? Cutting domestic spending during a recession? Cutting military spending during a global war?