Yesterday the Senate voted 60-39 to increase the United States debt ceiling to $14.3 trillion. It's likely that if Scott Brown were in the Senate instead of Paul Kirk, the increase would not have passed and Democrats would have had to negotiate a different version.
Debt is quickly becoming the defining issue of our times. One of the reasons health care collapsed was the public's understanding that there is no realistic way to increase government obligations while shrinking government spending (accounting tricks notwithstanding). The CBO's latest long-term budget outlook is absolutely dismal. Obama endorsed the deficit commission and non-defense discretionary spending freeze to counter the GOP critique that he and the Democrats are big spenders. It will take more than a toothless commission and a negligible reduction in spending to change public attitudes, however.
There is new evidence of the damage that excessive debt can wreak on an economy. Listen to The Economist's Buttonwood columnist, for instance:
A country can get out of the trap by growing more quickly or by cutting its bond yields. This is where my previous posts about the link between government spending and GDP growth kick in. If the rise in spending cuts the growth rate, as the ECB study shows, then the deficit has to be brought under control. Cutting the deficit has the extra benefit of reassuring the bond market and thus cutting yields. Indeed, in an ideal world, the government will run a primary surplus; that is its revenues will exceed its spending, before interest payments.
Tax rises don't help. A paper by Romer and Romer shows that tax changes designed to reduce an inherited budget deficit adversely affect growth; every 1% of GDP increases in taxes cuts real GDP by roughly 2-3%. Of course, what to cut will be a matter of intense debate; but cuts will be needed if things are not going to spiral out of control.
Buttonwood is describing Greece's current predicament (yes, one of the Romers he mentions is Obama's own economic adviser). But the lessons he cites are applicable to all countries. America in 2010 is not Greece in 2010. But, thanks to the irresponsibility of both political parties, America in 2040 might be.
Political gimmickry won't clean up America's long-term fiscal mess; neither will soaking the rich. The solution is for the political class to exhibit self-restraint and a commitment to limited government. And if you suspect that won't happen anytime soon, you are not alone.