Alaska editorial: Stimulus money threatens our fiscal rationality

Posted: Monday, March 02, 2009

Something must be done and it must be done now! This, the constant refrain, emanating, not only from Washington, but also from cities and villages across our great land. Apparently we are convinced.

Our collective cry is a demand for a stimulus package, crisis funding, a bailout. We could, if we had the daring, deem the stimulus not what it is seen as today, but what it shall be seen as for many years to come: that being a sure and definite burden on the shoulders of all citizenry, with none escaping its toilsome load.

Many wars, bloody and long, have been waged on the fertile soils of this grand country, and yet it is possible that our bloodiest battle is one waged not against a foreign army, but against an economic foe that presents as formidable a challenge as any in our history.

Without any stimulus for 2009, Americans face a budget deficit of $1.2 trillion. At the end of 2008, our federal debt stood at a whopping $5.8 trillion. Now that we have passed a package that adds $787 billion (representing the largest ever one-year increase in domestic federal spending) along with the proposed banking stimulus, we are projecting to close out 2010 with $9 trillion of debt. This figure represents 62.4 percent of our gross domestic product or economic activity.

According to a rather laconic editorial recently printed in the Wall Street Journal, the indebtedness encumbered by the United States, is about to enter into uncharted territory, and will "test the outer limits of our national balance sheet."

If you are over 40 years old, you might remember the hubris during the Reagan administration over our deficit spending. Under that presidency, our debt, as a percentage of GDP, never rose above 6 percent. The cry continued into the Clinton years, when calls to raise taxes were proffered because we had managed to spend ourselves into a debt ratio versus the GDP of 3.9 percent.

By the end of this year, we will have raised this threshold to a paltry 8.3 percent. This appears to be a nonstarter as once the proposed banking stimulus is added, we will have raised the level of debt in the United States to the unheralded level of 13.5 percent of our GDP. In a single year.

If our stimulus efforts do not, well, stimulate, our economy will face a challenge that could stretch our imagination and our pocketbooks to a whole new level.

According to Moody's Investors Service, the United States currently holds a "resilient triple A" rating. However, a dark cloud looms, and while Moody's stops short of any warning of a downgrade, the service did publicly announce recently that this rating for the U.S. "isn't assured forever."

Paying attention?

While all the countries of the world face severe economic challenges, in light of our proposed deficit spending by the ghosts of economic futures, many countries have pulled ahead of America in the ratings. Moody's report shows that Germany, France, Canada as well as Scandinavian countries, are pulling down a better credit rating than that grand ol' dame, the U.S. of A.

Our capacity to return to solvency is potentially assured by the sheer size of our economy and the tax base represented by the most industrious nation in the history of the world.

The threat is that once the economic indicators begin to tick upward, and tick upward they shall, this new threshold of spending will be maintained as our discipline wanes more and more in a postmodern era of narcissistic profligacy.

A glance over our shoulders implores the reality that spending patterns in Washington, D.C., for the past few decades have not fallen, but are perpetually sustained at new and higher levels. In our current glum environs, it is easy to envision any who resist these higher levels of spending in the future are branded as merciless, unfeeling wretches.

Curious, as we listen to economists argue the merits of Keynesian-style government intervention, often we find no mention as to whether this country can afford to spend trillions of dollars over a short period when we already carry a heavy chain of indebtedness around our necks.

Even one of our own local economists, Greg Erickson, authored an editorial, which ran in a Sunday edition of the Anchorage Daily News, well written Keynesian prose, but nary a word about potential effects of a massive debt on the private sector in the long term.

If our extravagant spending largesse doesn't have its intended consequences, America risks tarnishing its reputation as a desirable depository for capital from around the world. If that happens, inflation is likely the desired counter effect, but one that can leave lasting injury that could prove exceedingly difficult to mend back to health as the bond market risks being undone.

As we plunge headlong into unchartered waters, let's hope our compass remains intact, leading us back to the shore of fiscal rationality.

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