Everything Is Not Okay

Ross Douthat thinks that real government reform is institutionally impossible.

Under Franklin Roosevelt and Lyndon Johnson, liberals created a federal leviathan that taxes, regulates and redistributes across every walk of American life. In the process, though, they bound the hands of future generations of reformers. Programs became entrenched. Bureaucracies proliferated. Subsidies became “entitlements,” tax breaks became part of the informal social contract. And our government was transformed, slowly but irreversibly, into a “large, incoherent, often incomprehensible mass that is solicitous of its clients but impervious to any broad, coherent program of reform.”

He’s right. The concept of vast central planning and collective action through government has failed everywhere it’s been attempted, from the Soviet Union to California. Today we find a United States with unimaginable foundational problems. The largest of those foundational problems is the unsustainable federal debt, which has reached dangerous levels under the last two administrations. This year, the federal debt will reach 90% of GDP. Why is that important?

This new paper (PDF) from Kenneth Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland, both NBER members, shows that economic outcomes suffer mightily once a nation’s debt load reaches 90% of GDP.

Our main findings are:

• First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies.
• Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half.
• Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.)

In essence, we’ve run out of time. The grand experiment in central planning, from the New Deal to No Child Left Behind, has failed. There can be no accounting of the facts that disputes that conclusion.

The big question is this: what do we do now? How do we care for the sick, aid the poor and protect our citizenry from enemies foreign (terrorists) and domestic (Wall Street)?

While the President and Congress argue over the creation of a blue-ribbon panel to discuss the debt, some prominent former elected officials are taking matters into their own hands.

The blue-ribbon group of 18 to 20 members will be led by Pete V. Domenici, a Republican former senator from New Mexico who for years was the chairman of the Senate Budget Committee, and Alice Rivlin, a Democrat and former budget director for both Congress and President Bill Clinton who is also a former vice chairwoman of the Federal Reserve.

Their goal is to, by December, give Congress and Mr. Obama a multiyear plan to raise tax revenues and pare spending, especially for the Medicare and Medicaid programs, which are the biggest factors driving the projections of future high deficits, Mr. Domenici and Ms. Rivlin said in a joint interview.

And let me echo Sen. Domenici, who made this statement:

“There is nothing good for America that will come out of arguing which part of the debt each party is responsible for,” Mr. Domenici said.

It is also completely irresponsible in recent days for Congressional Republicans to refuse to take part in any effort that involves raising taxes. Yes, the problem is spending. But Republicans are just as responsible for overuse of the national credit card as Democrats over the last 10 years. Taxation levels should not rise permanently, but this situation does not get solved without paying for all that spending. If you’re not willing to accept temporary minor tax increases (to fix the past mistakes) to go with some major spending cuts (to create a sustainable future), then you’re a demagogue and you’re part of the problem.

POSTSCRIPT (1/26, 8:50am): As if we needed more evidence as to how bad things are, the President will be announcing a three-year freeze in discretionary, non-defense spending. The freeze, however, will not cover any huge new programs (jobs bill, alternative energy investment, second stimulus) that the Administration wants to implement, and is largely a “symbolic” gesture. The left is furious at the anti-Keynesian economics and the right is amused at this laughable attempt to improve the President’s approval ratings.

Berkeley economist Brad DeLong calls him “Barack Herbert Hoover Obama.”