Borrowing threatens U.S.
COMMENTARY BY EDEN MARTIN December 21, 2012 10:12PM
Updated: January 24, 2013 6:34AM
The “fiscal cliff” of automatic federal budget cuts and tax increases is now only days away. The very name shows it will be bad. Any movement in the direction of balancing the budget — any combination of cost reductions and tax increases — will tend to depress the economy. But the alternative is continued and increasing federal borrowing.
For too many years, our governments — federal, state and local — have incurred annual costs far greater than the revenues coming in. They borrowed to make up the difference, or they simply ignored the shortfall. We have shifted more and more of today’s costs of government to tomorrow’s taxpayers, who will have to bear not only the costs of their own time but also those incurred in the past. It’s unfair to them; and — what’s even worse — it’s dangerous to democracy.
Our various governments — Illinois is a good example — would like very much to continue to rely on borrowing. Springfield pays state workers. It funds contracts that put money in the pockets of contractors and their employees. It funds education and health care and safety net programs. Reducing any of these payments would be painful to someone. But so would increasing taxes to pay for them. So our “leaders” say: “This must be fixed” — and then they leave it to someone else to come up with a plan to reduce costs or raise taxes.
But folks who buy state bonds or sell office supplies to the state may begin to think: maybe now my bonds or my invoices won’t get paid. At first, lenders will demand higher interest from the state. Eventually, as in some parts of Europe, lenders may say: I’m not lending to you at all. That’s when a sovereign government has to choose between either grinding austerity or inflation of the currency, which in turn increases its citizens’ cost of living or steals from their savings. (Fortunately, neither Greece nor Illinois has its own currency.)
We will either get on track to balancing our governmental budgets or we will not. Either way — and this is the main point — the economy is going to take a hit. Balancing a budget by reducing the cost of government programs will mean less money in someone’s pocket. So will increasing taxes. But so will austerity if and when governments can’t borrow any more. The choice is between lesser hits that may be manageable if we can get on track to balanced budgets, and a far more brutal austerity later.
Balancing a budget through borrowing is like a drug habit. The longer you do it, the worse it gets. Withdrawal may be painful. But failure to withdraw leads to something far worse.
Commentators say going over the “fiscal” cliff would cause the economy to contract. Therefore what? So will any other combination of same-size cost reductions or revenue increases, whether in the form of tax rate increases or capping deductions.
Hopefully, the contraction — or even “recession” — would be brief. One thing seems clear. Such a contraction would be less severe than the far worse austerity measures that would result from the inability of governments to refinance their debts at any price.
When any of your friends tell you that going over the “fiscal cliff” would be terrible, you might ask them: “Compared to what?”
Eden Martin is a lawyer and former president of the Civic Committee of the Commercial Club of Chicago.