Obama Deficits Could Weaken American Power

Niall Ferguson, last November, published a pessimistic piece on the weakening economic foundations of U.S. power, "An Empire at Risk." I'm an optimist, of course, and I've commented here recently on my confidence that the next U.S. economic expansion will improve the nation's long-term prospects dramatically (balance of payments, chronic budget deficits, and the federal debt overhang). But this is a pretty staggering analysis:

The deficit for the fiscal year 2009 came in at more than $1.4 trillion—about 11.2 percent of GDP, according to the Congressional Budget Office (CBO). That's a bigger deficit than any seen in the past 60 years—only slightly larger in relative terms than the deficit in 1942. We are, it seems, having the fiscal policy of a world war, without the war. Yes, I know, the United States is at war in Afghanistan and still has a significant contingent of troops in Iraq. But these are trivial conflicts compared with the world wars, and their contribution to the gathering fiscal storm has in fact been quite modest (little more than 1.8 percent of GDP, even if you accept the estimated cumulative cost of $3.2 trillion published by Columbia economist Joseph Stiglitz in February 2008).

And that $1.4 trillion is just for starters. According to the CBO's most recent projections, the federal deficit will decline from 11.2 percent of GDP this year to 9.6 percent in 2010, 6.1 percent in 2011, and 3.7 percent in 2012. After that it will stay above 3 percent for the foreseeable future. Meanwhile, in dollar terms, the total debt held by the public (excluding government agencies, but including foreigners) rises from $5.8 trillion in 2008 to $14.3 trillion in 2019—from 41 percent of GDP to 68 percent.

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman. In 1945, the figure was 113 percent.

There's more at the link.

And now here comes this from the New York Times, "Deficits May Alter U.S. Politics and Global Power" (with emphasis added):

In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.

The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.

But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.

For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.

The United States can't easily be compared to Japan, but certainly there's danger in the long-term implications of monetizing the debt (a most logical response), which would devalue our currency and cause an increase in interest rates around the world, which would in turn cause U.S. borrowing costs to rise. It's unsustainable over the duration, but again, I'm not too worried, given appropriate and timely adjustments. The most important thing would be to get the disastrous Democrats out of power and return to a high-growth strategy of targeted tax breaks to expand the economy, along with a more cautious monetary policy to keep domestic inflation in check. Had the Fed not artificially stimulated the economy past the immediate period of post-September 11 crisis, it's unlikely the housing boom would have gone on as long as it did (holding the Democrats' Fannie/Freddie boondoggle constant), and the massive windfalls in tax receipts following the Bush tax cuts in 2003 would have been more sure to have kept budgetary pressures under control.

And note that that's the NEW YORK TIMES taking the Obama administration to task. This is not good for the demonic (O)CT(O)PUS' pseudo-analysis.