x Abu Dhabi, UAESunday 21 January 2018

Without change, US will only be borrowing time

The day will come when foreigners will no longer wager on the health of a country sliding into irreversible indebtedness.

A pastor prays for the future of the US auto industry during a special service in Detroit, Michigan, earlier this month.
A pastor prays for the future of the US auto industry during a special service in Detroit, Michigan, earlier this month.

Early this month, worshippers at a Detroit Pentecostal church gathered around an altar surrounded by three 4x4s and appealed for the divine salvation of America's troubled car makers. Despite the service's pagan quality - gas guzzlers as "golden calves" - the congregation was smiled upon last week with a last-minute conversion by President George W Bush, who overcame his resistance to a bailout for the country's car belt by approving a US$17.4 billion (Dh63.9bn) credit line. A day later, Mr Bush's successor, the president-elect Barack Obama, announced a plan to create three million jobs at an estimated cost of up to $775bn.

Between the bailouts, loan guarantees and debt forgiveness handed out by the US federal government over the past few months, the country's budget deficit next year is expected to come in at between $1 trillion and $1.5 trillion. As a percentage of GDP, that is the largest US budget shortfall since the Second World War. In real dollars, it is the biggest gap between a country's domestic spending and its economic output since the advent of the republic.

And that's the good news. Despite the hand-wringing over America's swelling indebtedness, its obligations are small change compared with what they will be in a decade or so, thanks to a demographic time-bomb that the US Congress and the White House have done nothing to defuse. Leave it to the generation that boasts the lowest savings rate on record to indulge itself on someone else's money. The national retirement plan known as Social Security, in addition to healthcare programmes for the aged and the poor, are running a surplus, with more labourers paying into the system through taxes than there are senior citizens drawing benefits. But the costs of these permanent entitlements, which already account for 42 per cent of the budget and are not subject to periodic review by legislators, will expand dramatically as those Americans born after the Second World War - the so-called "baby boomers" - enter retirement. Left alone, economists estimate the country's entitlement system could create a funding gap worth $43 trillion, or 300 times its GDP.

To finance that shortfall, Washington would have to double the tax burden while making massive cuts on every other budget commitment, from national security to the nation's badly strained infrastructure. Just serving that debt will cost $50bn for every $1 trillion that Washington borrows until the debt is paid off. If history is anything to go by, it will simply be rolled over. "You can't grow your way out of an obligation like this," says Brian Riedel, an economist at the Heritage Foundation, a conservative think tank in Washington. "You'd have to eliminate every other programme, and the longer we wait the more painful it gets."

Unfortunately, US politicians have notoriously low pain thresholds. So it is up to the economists to sound the alarm. Heritage and two other research institutes - the Concord Coalition and Brookings Institution - are embarking on a tour of more than 40 cities to alert Americans to the coming "Great Indebtedness". Well before the financial crisis besieged the global economy, a panel of budget experts from across the political spectrum released a report that rebuked Washington's deficit denial as "both risky and irresponsible toward those who come after us". The report recommended that Congress and the president enact 30-year budgets for Medicare, Social Security and Medicaid, that Congress review those budgets every five years, and automatic programme cuts or revenue increases be triggered if projected spending exceeds the budget.

The magnitude of America's long-term fiscal burden dwarfs what Congress and the White House are dishing out to keep the economy afloat in what is, after all, a cyclical downturn. It undermines the credibility of Mr Obama's ambitious plans to revive US infrastructure, save the environment and provide comprehensive, affordable health care. While the nation may take some comfort in the global demand for US sovereign debt, that will prove a temporary refuge unless Washington gets serious about reforming its broken entitlements system.

Otherwise, the day will finally come when foreign governments and institutional investors will no longer wager on the health of a country sliding into irreversible indebtedness. It will take a pretty thick rug for Americans to pray their way out of a bind like that. Stephen Glain is a business columnist for The National and the author of Mullahs, Merchants and Militants: The Economic Collapse of the Arab World.