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?


(Hat tip: Megan–who, I’m led to believe, has a picture up at TechCentral)

FILED UNDER: Economics and Business, , , ,
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. Steven says:

    Not to mention that, if we are going to be honest, deficit spending has been the norm of US fiscal policy, not some strange new phenom. Indeed, while I would prefer that we have balanced budgets, I am having a hard time getting overly hyper about the current deficit, as it is likely to start shrinking once the economy starts growing again.

    My real question is why many Dems keep acting like deficits are brand spaking new.

    Indeed, I did some research on this a while bac, both here and especially here. The last posts notes that since 1933 we have only have budget surpluses 12 times (out of 70 budget cycles).

  2. JC says:

    Well, being bitch slapped about them during the 90’s (as if the deficits were entirely the Dem’s fault) certainly had a certain amount of Pavlovian conditioning.

    And, if memory serves me correctly, the recession was over in 2001. So, two more years of increasing deficit spending doesn’t seem to hold up to your question as to what we were supposed to do.

    Of course, there’s the fact that half of the FY 2004 deficit is due to the tax cuts.

    And as to the global war, that’s a good one. Kind of like killing your parents and then claiming mercy as you’re now an orphan.

    Good one.

  3. Paul says:

    John do you actually read?

    And, if memory serves me correctly, the recession was over in 2001. So, two more years of increasing deficit spending doesn’t seem to hold up to your question as to what we were supposed to do.

    Who drew a line between the lack of recession and the lack of a deficit? He specifically said that there have only been a balanced budget 12 times out of 70. Do you think he said there was a recession the other 58 times? The two are not related!

    Is reading before spewing too much to ask?

    There is another thing I love.. The great lie of the budget surplus. Bill Clinton DECLARES there will be a surplus of XX trillion dollars over the next 10 years. What a moronic thing to do. You can’t predict what will happen for 10 years. 9/11 proved that!

    OK So when Bush leaves office he can say that we would have had a surplus of XXX Trillion except for the Dem behind him. How moronic– measuring against something that never happened.

    But Dems live for the delusion and this is another one.

  4. IceCold says:

    Some say sure, Krugman’s sophomoric or worse on politics and foreign policy, but hey, on economics …. well I have yet to see a column on economic matters that was worth reading, either. This one’s mostly amusing for the devastating fisking it received.

    Newsflash to Krugman: there are almost always “structural” fiscal problems with (barely) conceivable out-year catastrophe scenarios attached to them. These things tend to get fixed, and the worst-case scenarios never seem to happen. Social Security has been on a “structurally” problematic course more than once, and been changed (as in the 1980s).

    Disentangling his disingenuous economics from his infantile politics would be hard, but why even bother?

    It’s also useful to remember what nonsense most public rhetoric about deficits and surpluses (by both major parties) usually is. I recall that in one of the last budget cycles prior to the federal surpluses in the late 1990s, Clinton’s OMB director denounced the GOP-run House’s budget alternative, and claimed that any attempt to balance the federal budget in less than 10 years would force draconian and disastrous service cuts. Oops. Without any help from either that OMB director or the House GOP, the budget went into surplus for the next two cycles. And of course both sides (utterly without merit) asserted their authorship of this wonderful development.

    A previous comment here linked to an OMB-related site. Contrary to the hyper-linked text in the comment, the Bush tax cuts are NOT estimated to account for half of the deficit now or next year; the cuts are estimated to account for just under half of the DIFFERENCE between the deficit projections in two CBO budget forecasts. A little bit of incredibly lame, transparent “Krugmanomics” right here in the comments section!

    Meanwhile, deficit projections are shrinking. No surprise, given increased economic activity. Nothing to reflect this on the CBO site yet, but if you go there check out the budget forecast. Interesting that the headline-grabbing $400B+ deficits this year and next rapidly and dramatically drop off thereafter, and are in historically-average ranges until just about disappearing around 2010.

  5. melvin toast says:

    Let’s say you’re starting a business. You have no assets and no investors. What do you do to get it rolling?
    Deficit spending of course.

    In fact, business are wont to spend more money than they have. That’s why there’s such a thing as corporate bonds.
    Of course people buy those bonds because they figure SOMEHOW the business will be able to pull itself out of the hole that it’s dug and become profitable.

    And yes, SOME businesses don’t make it and go bankrupt. But I haven’t heard of a business with a monopoly go bankrupt yet. In fact, the monopoly on government services is so strong that you go to jail if you don’t buy them.

  6. melvin toast says:

    I went over to Calpundit to see what he had to say about megan’s hairdo and he says that we only have two choices, cut benefits or raise taxes.

    I think it’s interesting that liberals see tax revenue as some percentage of a static pot. Isn’t it possible that the economy could grow substantially thereby raising tax revenue without raising marginal rates?

    When businesses are having trouble covering the rent do they ask themselves, “We have two choices, make cheaper products or raise prices”? How about collecting more revenue without raising prices or lowering quality?

    One other thing. Walmart and Costco are killing ma and pop stores because it’s hard to compete with their cheap prices for the same products, plus you get more variety and more convenience. In short, they’re more efficient. Walmart is so efficient that they’re opening a store every other day and still making a profit. Can’t the government do more with less like they do?

  7. JC says:

    Paul: Do you think?


    Melvin: I’ve actually started up my own business and was profitable every year for 5 years before I sold it.

    Don’t lecture me on this, please.

    Double Geesh.

    Do you people have brains?