On Thursday the non-partisan Congressional Budget Office (CBO) announced the federal budget deficit for 2010 will exceed $1.3 trillion. This is already on the heels of a 2009 budget deficit of $1.2 trillion and on top of a national debt of some $13.3 trillion. The word ‘trillion’ seems to have, almost overnight, crept into our standard economic parlance and by the looks of it is here to stay. And with the CBO’s forecast of more than $6 trillion in federal budget deficits accruing over the next nine years from 2010 to 2019, many are logically wondering if the United States has effectively crossed, or is fast approaching, a virtual economic point of no return — an economic Rubicon if you will.
The comments coming out of Washington have also placed the public in a state of wonderment as to when the deficit spending will be stemmed and at what cost. As recently as July 21, Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee and summed up his entire set of prepared remarks in the following nine ominous words, “… we also recognize that the economic outlook remains uncertain.” Couple this with CBO Director Douglas Elmdorff’s comments last week that, “[t]he U.S. economy faces difficult times ahead with chronic unemployment and slow manufacturing hurting the pace of recovery” and the level of uncertainty Americans have been feeling over the economy likely got a whole lot worse.
Not long ago, it would have been economic heresy to suggest the world’s greatest super power and beacon of democracy would be faced with such grim financial prospects and potential economic denudement. Times however, have changed and the talk has gone from boom to bust in equally robust terms. No longer is the idle chatter around dinner parties about cashing in on home equity lines of credit and whether the newfound bank line largess should be spent on a Mediterranean vacation or custom designed backyard pool with waterfall. The new boom-to-bust economic reality we now reside within has affected the nation’s households across the board and in that regard has pervaded America on an equal opportunity basis. For our new economic reality has been non-discriminatory in its application and is hitting Middle America hard. Today, we have traded in the dinner parties for frugality and have adjusted to fast food and potlucks.
With Washington forecasting continued economic uncertainty and with the country incurring massive and historic debt, many are wondering what the game plan is or if indeed there is one beyond the government spending massive sums of money.
This is precisely where the economic analysis becomes a heavy shade of gray for it is far from clear as to what path will lead to an economic recovery. Leading economists are at odds with each other in how to best fix the ailing economy and in many cases even disagree as to the short-term and long-term effects our expansion of debt will actually have on the economy. To say a plurality of economic opinion exists would be an understatement and a profound one at that.
Take for example the economic positions held by the famous Princeton Professor of economics and 2008 Nobel prize laureate, Paul Krugman. Krugman, while generally a staunch advocate of the Obama administration, is quite critical of the president and administration for not spending more on economic stimulus plans and has even suggested nationalizing retail banks. Krugman is a Keynesian-styled economist promoting the notion that the federal government should provide virtually limitless stimulus in the midst of dramatic economic downturns. Writing for the U.K. Guardian in an August 10 article, Krugman starts off with the following statement: “So it seems that America isn’t going to have a second Great Depression after all. What saved us? The answer, basically, is big government.” Later, Krugman draws a stinging reference to Republican House Minority Leader John Boehner in writing the following: “Back in March, John Boehner, the House minority leader, declared that since families were suffering, “it’s time for government to tighten their belts and show the American people that we ‘get’ it.” Fortunately, his advice was ignored.”
Krugman does not mince words and while he does acknowledge massive government debt could have negative consequences, he believes the United States is far from a point where the amount of its debt, as massive as it currently is, will create such consequences. This was made clear in a February 23, 2009 interview with Barron’s Investment wherein Krugman is quoted as saying, “Well, large-scale government borrowing does pose long-term fiscal risks; the U.S. has substantial room for additional borrowing, but it’s not unlimited, Aside from that, I don’t see big risks.”
Unlike Krugman, consulting economist John Williams is not at all disaffected with the size of the federal debt and its seemingly perpetual expansion. John Williams studied economics at Dartmouth College receiving both an A.B. in economics, cum laude in 1971 and an MBA in 1972. For the past 30 years Mr. Williams has been a consulting economist in the private sector and has also, over the same period, been analyzing the government’s tracking of unemployment, inflation and money supply. According to Mr. Williams’s research, the government’s statistics are substantially off. Where the government places inflation at under 2 percent , Williams places it at over 4 percent and where the government places its broadest category of unemployment (a category which factors in short-term discouraged workers and those forced to work part-time due to the inability to find full-time employment) at just above 16 percent, Williams’ places it at around 22 percent.
Williams sees the federal debt as wholly unsustainable and places the total amount of the government’s unfunded obligations, which includes entitlements such as social security and Medicare, at over $75 trillion. Where Krugman sees increased federal spending as a necessary life-line for rebounding the economy, Williams just sees debt and the eventuality of hyperinflation. In December 2009, Williams published an economic report titled, “Hyperinflation Special Report” and in early 2010 updated his report moving up his timeline of hyperinflation to occur sometime between 2010 and 2018, writing, “[t]he U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, as solution for modern sovereign states rarely seen …”
Economists Paul Krugman and John Williams represent a microcosm of the stark variations found within the field of economics, proving the field of economics is anything but an exact science.
Whether we have crossed the economic Rubicon will perhaps best be determined through the application of common sense by the so called non-experts i.e. We the People.