The President Talks About Jobs
12:00 AM, Mar 26, 2011 • By IRWIN M. STELZER
Herb Stein, a wise economist who is no longer with us, once said that if something cannot go on forever, it will stop – his version of the old Wall Street saw that no tree grows to the sky. The question being debated in America is not whether the deficit will grow forever, or to the sky, but what will stop it. John Lipsky, first managing director of the International Monetary Fund, says that unless the politicians devise a credible plan to rein in the debt, the markets will make continued borrowing infeasible. What Lipsky calls the “fiscal crisis” will occur when the so-called bond vigilantes become so skeptical of America’s ability to repay its debt without first debasing its currency that they demand ever-higher interest rates. Until now, borrowing costs have been low, in part because the Federal Reserve Board has been buying up Treasury bonds. Sooner or later that will stop, and unless there is a dramatic change in policy, interest rates will soar, consuming ever-larger portions of the federal budget. Think Portugal, with a government in crisis because of voters’ apparent unwillingness to adopt an austerity program, or Greece, unable to collect taxes, or Ireland, so heavily indebted that the markets have said “no more.” Greece and Ireland have already accepted bail-outs from their eurozone allies, and Portugal is next in line. America is somewhat better placed: having our own currency, we can always simply print dollars to repay debts. That has a price: higher interest rates that hardly contribute to job creation.
Even more worrying than the GAO and CCO reports are the increasing number of studies that show that as a nation’s debt-to-GDP ratio crowds 90 percent – a level the U.S. will reach in about a decade – growth slows. That, for Obama, is a problem to be faced, if at all, after he is safely back in the White House in 2012. Meanwhile, he wants to spend more on infrastructure, green initiatives, high speed rail and the like – call it Stimulus 3. In his version of Admiral Farragut’s Civil War order to damn the torpedoes, full speed ahead, the president would damn the deficit and continue spending at full speed.
It is, of course, possible that Obama will decide that his reelection prospects will be enhanced by brokering a deficit-reduction deal between his party’s spend-more left and the Republican tax-less right, that voters want jobs but not at the expense of their children and grandchildren’s living standards. In which case Republicans might decide not to give him such a gift. Spring may have sprung in Washington, but electoral politics remain a cold, hard business.
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