President Obama’s budget projects 1.3 trillion dollars in deficit in fiscal 2011. This has provoked a Republican outrage that I simply fail to understand. Here are the facts:
- When President Bush came to power, America was in its 3rd consecutive year of budget surplus.
- He cut taxes and went on a spending binge, with strong Republican support. He eventually spent more than any other president since LBJ, including nearly a trillion on the invasion of Iraq.
- In the process, the Republicans used up the surplus so swiftly that America ran a large deficit 7 out of the 8 Bush years, consecutively since 2001.
- They accelerated the hands-off policies started during the Clinton era, giving financiers the biggest say in a democracy, and ushering the biggest downturn since the Great Depression.
- The administration spent another $868 billion on bailing out the financiers and providing stimuli before bowing out in 2008.
So after the “frat boy shipped out,” as The Economist put it, leaving America in a mess on multiple fronts, his supporters are now upset that the “socialist” Obama administration has to run another budget deficit?
This is the type of irresponsible amnesia on part of the Republicans and the Tea Party fanatics that’s going to hurt America’s global position.
And that’s what my article is about. But I had to introduce the context, because another irresponsible refrain you hear from the right is that the rest of the world is just out to get America.
My question is, will the world continue to sponsor the debt that the United States has raked up? America’s “aura of invincibility,” wrote David Sanger in the New York Times, will last “maybe a long, long time.” While investors would malign any other economy under similar management, it shrugs off “American financial exceptionalism.” So the capital markets worried this week about Europe’s growing debt, but they hardly paid attention to Moody’s polite warning that America’s financial health “will at some point put pressure on [America’s] triple-A government bond rating.”
This optimism and this belief in exceptionalism is a dangerous consequence of the way US politicians allowed the development of a neo-laissez faire: Just borrow and spend, all will be fine in the end. You see that in consumer habits, in subprime markets, in Wall Street’s philosophy of heavy leverage, and in wanton federal spending while lowering taxes. Risk management was mostly rhetoric.
And so, the US government debt burden now is 85 percent of GDP. This is higher than the proportion in the “socialistic” Europe vilified by the American right. Germany: 79 percent, France: 77 percent, Portugal: 76 percent, Britain: 69 percent, and Ireland, which IMF claimed was the sickest of them all: 61 percent.
Still ok, if someone (read: China) is willing to underwrite the debt. China still holds the world’s highest share of US treasury bonds, almost $800 billion worth. But it has been buying less and less, signaling discomfort.
In the 1990s, Canada lost Moody’s triple A rating when its combined federal and provincial debt approached 100% of GDP. As the US inches to that level, a ratings blow may be nearer than most optimists believe.
And for America, that type of a blow will be more than economic. It will send a powerful political message about the overstretch of the world’s superpower. The world wants to believe that US politicians will be able to enact meaningful fiscal change, keeping its long term financial health squarely in sight. But so far, especially with the naysaying, amnesiac, and reactionary performance shown by the right, they will have little to find comforting.