As we celebrate the 239th anniversary of the signing of the Declaration of Independence in 1776, Americans have much to be thankful for. It is often said that the United States is the strongest, wealthiest and freest country the world has ever known. Although this may be somewhat of an exaggeration (see below), it is still indicative of how fortunate we are compared to the rest of the world. As we celebrate our good fortune, we need to be acutely aware that our continued success as a great nation is not automatically assured. In fact we face a number of troubling and persistent problems which are not likely to disappear unless we take strong action to address them. For example we have:
A stagnant economy with only 2.2% annual growth since the end of the Great Recession. And the Congressional Budget Office predicts no speed up over at least the next ten years, based on current policy. Such slow growth condemns 20 million unemployed and underemployed citizens to unfulfilling lives, as well as lackluster pay raises for many more tens of millions.
Massive debt. Our public debt (on which we pay interest) is now at 74% of GDP, highest since the end of WWII, and predicted by the CBO to grow rapidly under current policies. When interest rates return to the normal 5% level, interest payments on the debt will skyrocket, making it much more difficult to fund all of the federal programs we depend on for our quality of life.
Increasing Income Inequality is real even if overhyped in the media. America is still a land of great opportunity but basic fairness demands that all citizens be able to share in our national abundance.
Threats from abroad. ISIS now controls much of Iraq, Syria and northern Africa and must be defeated. NATO needs our very strong support, all the more so with the Eurozone and European Common Market under increasing pressure from within.
As the strongest nation in the world we have much responsibility for continued world peace and prosperity. We can’t fulfill this role adequately unless our own internal fiscal and economic policies are in fundamentally sound shape.
Let’s be thankful for what we have and bear down hard to insure that we keep it!
As I have mentioned before, I am a volunteer for the nonpartisan Washington D.C. think tank “Fix the Debt.” As such I give presentations to civic organizations in the Omaha area about our debt problem and what we can and should do about it. I have now given four such talks and have another one coming up next week.
What is most difficult for me is to try to convey a sense of urgency about addressing this problem. Most people deplore deficit spending in a general sense but not nearly enough people think that dealing with it should take priority over current presumably pressing spending needs such as, for example, depletion of the highway trust fund, expanding military spending, or improving early childhood education, just to be specific.
So here is how I am going to try to create a greater sense of urgency. Several months ago I had a post entitled, “The Slow Growth Fiscal Trap We’re Now In” in which I said (in brief summary) that our current economic condition of
slow growth means
low inflation which leads to
low interest rates which in turn leads to
massive debt which eventually leads to a new and much more severe
This is the predicament we’re now in. Do we consciously maintain a slow growth economy, with all the unemployment pain and stagnant wages which this entails, or do we speed things up, enabling more people to go back to work, and also deal with the higher inflation and interest rates which this will entail?
Faster growth may well eventually come on its own anyway and then we’ll be forced to fix our fiscal problems at a time when they’ll be much worse than they are now.
Isn’t it clear that it is much better to act now in a responsible manner rather than to wait and have to react hurridly later on when the problem is much worse?
Our economy has been growing very slowly, about 2.2% per year on average, since the end of the Great Recession in June 2009. The Congressional Budget Office predicts that this slow growth will continue indefinitely, although with a brief respite of 2.9% growth in 2015 and 2016. The American Enterprise Institute predicts an even lower, less than 2% growth rate, going forward. Here’s the essence of the overall problem:
Slow growth keeps the unemployment level high and also means minimal raises for employed workers The resulting economic slack leads to
Low Inflation. But low inflation in turn means that the Federal Reserve can try to increase growth with quantitative easing and at the same time maintain
Low Interest Rates to encourage borrowing. But an unfortunate side effect of low interest rates is that Congress can borrow at will and run up huge deficits without having to worry about paying interest on this “free” money. This leads to:
Massive Debt. But what is going to happen when inflation does take off which is bound to happen eventually? Then the Fed will be forced to raise interest rates quickly and we will be stuck with huge interest payments on our accumulated debt. When this happens, interest payments plus ever growing entitlement spending will eat up most, if not all, of the federal budget. This will almost inevitably lead to a severe
Of course, there are alternative scenarios. Congress might become more responsible and cut spending and/or raise taxes. We might luck out, so to speak, with such prolonged slow growth that inflation stays low indefinitely and interest rates never increase. But slow growth is not pain free. There are 20 million unemployed or under-employed Americans who want to work and whose lives are much less satisfying as a result of being idle.
Isn’t it obvious that the best response to this slow growth fiscal trap is to adopt policies to make the economy grow faster? There are lots of things that could be done, many of which I addressed in my last post (https://itdoesnotaddup.com/2015/03/01/will-middle-class-economics-lift-us-out-of-secular-stagnation/) so I won’t repeat them here. But I’ll be coming back to them again and again in the future!