October 14, 2013 4:00 AMThe Folly of Doomsday Economics
Jeremiahs on the right are increasing the likelihood of the scenario they fear.
By James Pethokoukis
Ted Cruz’s dad is the pastor in his family, but it was his son the senator who was preaching an apocalyptic sermon at last week’s Values Voter Summit. “We have a couple of years to turn this country around or we go off the cliff to oblivion,” Cruz said. Such warnings of impending national doom are common these days, from both the left and the right. Jeremiahs on the right predict that a debt crisis is a year or two off and hyperinflation is just around the corner, and they insist Obamacare is the worst thing to happen to America since slavery. The American economy, in short, is minutes from midnight.
This embrace of doomsday economics explains a lot about the Tea Party. If you truly believe those catastrophic predictions are more than just spicy rhetoric, then a government shutdown, collapsing poll numbers for the GOP, and even a debt default are small prices to pay for staving off the end of America as we know it. The line must be drawn here, or we will sink into a new dark age.
But you don’t get credit for predicting, say, a debt disaster if your own actions are directly responsible for creating that disaster. Here’s what would be terrible for our nation’s finances: a nasty economic downturn of the sort that will almost surely follow if Washington fails to raise the debt ceiling. Citigroup’s economic team recently ran a simulation that assumed the debt ceiling was not raised and ongoing revenues were used to pay the interest on the debt. The Citi models suggest that these actions would lead to an extended impasse, which in turn would reproduce the Great Recession, with unemployment returning to near 10 percent over the next year.
And as the economy tanked, the budget deficit and debt would soar thanks to automatic stabilizers such as unemployment benefits, which boost spending, and reduced economic activity, which depresses tax revenues. Recall that what really created the euro-zone debt crisis was not a sudden surge in spending but an economic collapse that made previously affordable debt levels suddenly unsustainable.
Unless Washington’s budget bungling creates an insta-crisis, current federal debt levels are more of a drag on growth than they are a dangerous crisis requiring drastic action. Rapidly declining deficits might bring the federal budget near balance over the next couple of years. While total federal debt equals total ouput (the GDP), interest payments are at a 40-year low; and many nations have weathered a far higher debt burden even without the benefit of their currency’s being the globe’s reserve. Higher interest rates could cause bigger debt payments, but that is likely to be accompanied by faster growth, a larger economy, and more ability to pay.
The real problem is that the national debt will be starting from historically high levels when the entitlement tidal wave begins to make landfall. Rather than making additional abrupt, haphazard cuts to discretionary spending, we should seek to reform entitlements ASAP and create a gentle path back to prerecession debt levels.
As for fears that the Federal Reserve has created the conditions for an unprecedented price surge, keep in mind that both government and private-sector measures show inflation quiescent. Looking ahead, the Federal Reserve Bank of Cleveland reports that its latest estimate of ten-year expected inflation — based on market measures and surveys — is 1.86 percent. And the dovish reputation of Janet Yellen, President Obama’s pick to replace Ben Bernanke as Fed chair, seems overstated. In a speech on April 11, 2011, for instance, Yellen said the bank “is determined to ensure that we never again repeat the experience” of the inflationary 1960s and ’70s.
And for all the law’s many faults, there is a salvageable idea at the core of Obamacare: the creation of online insurance marketplaces where low-income Americans can buy subsidized private policies. Health-care expert Avik Roy has outlined a process to fundamentally transform Obamacare into FreeMarketCare: (1) deregulate the state exchanges while capping subsidies; (2) slowly shift Medicare and Medicaid patients into the exchanges; (3) let more people buy insurance on their own rather than through employers.
Obamacare’s implementation doesn’t have to mean we’re on a one-way trip down the road to serfdom — single-payer is not inevitable. And a dose of realism about that and other economic problems such as debt and inflation would leave more political oxygen for pressing issues such as long-term unemployment, income mobility, and reduced levels of business startups.
The threat America faces isn’t so much death and destruction as it is the prospect of a long, slow decline. Of course, that’s not as dramatic as pronouncements of a countdown to midnight. Just more realistic.
— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.