Diary

Reality check on the debt

Our country has a problem with debt. With the situation our economy is in, it’s a problem that won’t be going away on it’s own anytime soon. The massive deficits we are currently running aren’t helping either. The options on the table to deal with this problem seem to range from ignoring the problem and continuing a program of reckless spending to forcing an immediate balancing of the budget. If we ignore the problem, our situation will quickly deteriorate until it cannot be ignored any longer and drastic measures become necessary. Immediately reforming entitlements and balancing the budget will also have negative consequences. There is a large constituency that has come to rely on Uncle Sam’s largesse, and a lot of financial pain can be avoided if we wean them from government dollars gradually.

Social security, Medicare, and Medicaid are major drivers of federal spending, but people depend on these entitlements. No one wants to see seniors subjected to abject poverty or children suffer because they aren’t receiving the most basic medical service. Even if we had to choose between cutting off these entitlements and destroying the economic engine of our country, there isn’t the political will to completely end entitlements. Entitlements support strong voting constituencies. Forced to make the decision, the politicians will inevitably choose to destroy our economy while laying the blame somewhere else.

Even if we do get to the point where major cuts become a political necessity, it’s not just the fat that’s going to get cut. There are vocal constituencies for all of the programs supported by discretionary spending as well. It is not politically feasible to only cut programs where conservatives think government has no business to meddle. Balancing the budget is going to require cuts to important government functions such as national defense. Although it’s annoying to hear the constant whining about “fairness”, too many people have become dependent on the government to ignore it. The only way to keep the entitlement mentality in check in the face of deep cuts is to make cuts that are roughly even across the board. Across the board cuts will be the only way forward when our government enters crisis mode and a compromise needs to be reached quickly for action to be taken. These across the board cuts will happen whether they are the result of real cuts or papered over by inflation.

For the time being, we can thank the economic turmoil in Europe for keeping us afloat. Until the Europeans get their act together, we can keep the current teaser rate on our national credit card without the Fed printing massive amounts of money to buy up treasury bonds to keep the yields low. Although the Fed has already been monetizing the debt to some extent, the printing presses haven’t been working overtime yet.

If there was a better place to park large sums of money, we’d be in serious trouble right now. As much as I hate to wish ill on others, we can only hope that Europe teeters on the brink without a wave of defaults long enough for us to get our house in order. If we’re lucky, we’ll avoid having to make tough decisions with some sensible reforms to entitlements, modest cuts in government spending, and some drastic action to clear the way for the private sector to grow the economy. If we’re unlucky, Washington will avoid the tough decisions with the printing press.

Cross posted at The Right Stuff