The scariest thing I heard last week was a radio interview with Princeton economist and New York Times columnist Paul Krugman. Mr. Krugman said the federal deficit is growing so large and so quickly that one of three potential outcomes is nearly inevitable.
Outcome one – higher taxes. It’s fairly certain George W. Bush will not raise taxes, but the deficit may help bounce him out of office and it will fall to his successor to raise taxes, and that tax increase will have to be steep. Not only are there tens of billions in Iraq war debt, but also untold billions in taxes we have not collected from the rich since 2001 (before then, really, but it got much worse in 2001).
Outcome two – fewer services, many fewer services. If you want an idea of what this looks like, keep an eye on Alabama. That state is broke and its voters just rejected a tax increase that would have brought Alabama’s services closer to those offered by other states. How do mass layoffs of teachers, cops and firefighters sound? How about mass releases from prisons? This is probably the scenario the Bush administration has in mind. In 2001, then-Treasury Secretary Paul O’Neill said the federal government should not fund anything except the military. To date, I have seen no statement from the Bush team contradicting this notion.
Outcome three – Argentina Syndrome, or complete financial meltdown. Think it can’t happen here? Think again. Last year – 2002 – foreign investors purchased almost 60 percent of the securities sold by the U.S. Treasury. Foreign investors do not buy U.S. Treasury bonds because they have an affinity for American culture; they buy our bonds because those bonds are stable, interest-bearing instruments. The larger the deficit grows, the more difficult it will be to pay off the bonds. If that’s the case, foreign investors might stop buying the bonds. Worse, they might start dumping them back on the market. The faster investors dump our bonds, the worse the deficit gets. In economic circles, this is known as a death spiral.
We’ve had deficits before, like the one generated by the supply-siders in the early Reagan administration. The answer to that deficit was outcome one – higher taxes. Both Ronald Reagan and the first George Bush raised taxes, because unlike the current George Bush, they are not complete wackos. Besides, Baby Boomers were then just middle-aged. Next year, the leading edge of the Baby Boom turns 58. Retirement is just around the corner and that’s when the Social Security surplus begins to dry up. If there’s less money to borrow from the Social Security surplus, the Treasury has to sell…. more bonds.
A significant development this week was the revolt of the poor nations at the World Trade Organization meeting in Cancun. The Rube Goldberg machine that is the U.S. – and world – economy has kept running for the past 20 years through ever-increasing global trade. Globalization has allowed countries of the northern hemisphere to extract the natural resources of the southern hemisphere, flood the markets of poor countries with our subsidized farm products and ship our manufacturing jobs overseas while the profits keep flowing back to the U.S., Europe and Japan (at least to the rich people).
The short end of the stick keeps getting shorter and shorter for the Brazils, Indias and Chinas of this world and starting last week they got together to say that unless global trade becomes more of a two-way street, it will soon be a dead-end street. It’s just George W.’s bad luck to be president when an epidemic of fairness breaks out.
All of which means that maybe there’s a fourth outcome, one unspoken by Paul Krugman. Maybe all this economic turmoil will cause the U.S. to become more militaristic and use our sole superpower status to arbitrarily invade other nations and plunder their natural resources for our own advantage.
The Fourth Outcome
The scariest thing I heard last week was a radio interview with Princeton economist and New York Times columnist Paul Krugman. Mr. Krugman said the federal deficit is growing so large and so quickly that one of three potential outcomes is nearly inevitable.
Outcome one – higher taxes. It’s fairly certain George W. Bush will not raise taxes, but the deficit may help bounce him out of office and it will fall to his successor to raise taxes, and that tax increase will have to be steep. Not only are there tens of billions in Iraq war debt, but also untold billions in taxes we have not collected from the rich since 2001 (before then, really, but it got much worse in 2001).
Outcome two – fewer services, many fewer services. If you want an idea of what this looks like, keep an eye on Alabama. That state is broke and its voters just rejected a tax increase that would have brought Alabama’s services closer to those offered by other states. How do mass layoffs of teachers, cops and firefighters sound? How about mass releases from prisons? This is probably the scenario the Bush administration has in mind. In 2001, then-Treasury Secretary Paul O’Neill said the federal government should not fund anything except the military. To date, I have seen no statement from the Bush team contradicting this notion.
Outcome three – Argentina Syndrome, or complete financial meltdown. Think it can’t happen here? Think again. Last year – 2002 – foreign investors purchased almost 60 percent of the securities sold by the U.S. Treasury. Foreign investors do not buy U.S. Treasury bonds because they have an affinity for American culture; they buy our bonds because those bonds are stable, interest-bearing instruments. The larger the deficit grows, the more difficult it will be to pay off the bonds. If that’s the case, foreign investors might stop buying the bonds. Worse, they might start dumping them back on the market. The faster investors dump our bonds, the worse the deficit gets. In economic circles, this is known as a death spiral.
We’ve had deficits before, like the one generated by the supply-siders in the early Reagan administration. The answer to that deficit was outcome one – higher taxes. Both Ronald Reagan and the first George Bush raised taxes, because unlike the current George Bush, they are not complete wackos. Besides, Baby Boomers were then just middle-aged. Next year, the leading edge of the Baby Boom turns 58. Retirement is just around the corner and that’s when the Social Security surplus begins to dry up. If there’s less money to borrow from the Social Security surplus, the Treasury has to sell…. more bonds.
A significant development this week was the revolt of the poor nations at the World Trade Organization meeting in Cancun. The Rube Goldberg machine that is the U.S. – and world – economy has kept running for the past 20 years through ever-increasing global trade. Globalization has allowed countries of the northern hemisphere to extract the natural resources of the southern hemisphere, flood the markets of poor countries with our subsidized farm products and ship our manufacturing jobs overseas while the profits keep flowing back to the U.S., Europe and Japan (at least to the rich people).
The short end of the stick keeps getting shorter and shorter for the Brazils, Indias and Chinas of this world and starting last week they got together to say that unless global trade becomes more of a two-way street, it will soon be a dead-end street. It’s just George W.’s bad luck to be president when an epidemic of fairness breaks out.
All of which means that maybe there’s a fourth outcome, one unspoken by Paul Krugman. Maybe all this economic turmoil will cause the U.S. to become more militaristic and use our sole superpower status to arbitrarily invade other nations and plunder their natural resources for our own advantage.
Oh, I forgot. We already did that.