When something can't go on forever . . .
Robert Samuelson writes:
We are shifting from "give away politics" to "take away politics." Since World War II, presidents and Congresses have been in the enviable position of distributing more benefits to more people without requiring ever-steeper taxes. Now, this governing formula no longer works, and politicians face the opposite: taking away -- reducing benefits or raising taxes significantly -- to prevent government deficits from destabilizing the economy. It is not clear that either Democrats or Republicans can navigate the change.Samuelson's theme is that the political class, and the political structure, may not be capable of resolving the crisis. He cites three three historical instances of similar impasse:
For years, there has been a "something for nothing" aspect to our politics. More people became dependent on government. From 1960 to 2010, the share of federal spending going for "payments to individuals" (Social Security, food stamps, Medicare and the like) climbed from 26 percent to 66 percent. Meanwhile, the tax burden barely budged. In 1960, federal taxes were 17.8 percent of national income (gross domestic product). In 2007, they were 18.5 percent of GDP.
This good fortune reflected falling military spending -- from 52 percent of federal outlays in 1960 to 20 percent today -- and solid economic growth that produced ample tax revenues. Generally modest budget deficits bridged any gap. But now this favorable arithmetic has collapsed under the weight of slower economic growth (even after a recovery from the recession), an aging population (increasing the number of recipients) and high health costs (already 26 percent of federal spending). Present and prospective deficits are gargantuan.
The trouble is that, while the economics of give away policies have changed, the politics haven't. Liberals still want more spending, conservatives more tax cuts.
Our political system has failed before. Conflicts that could not be resolved through debate, compromise and legislation were settled in more primitive and violent ways. The Civil War was the greatest and most tragic failure; leaders couldn't end slavery peacefully. In our time, the social protests and disorders of the 1960s -- the civil rights and anti-war movements and urban riots -- almost overwhelmed the political process. So did double-digit inflation, peaking at 13 percent in 1979 and 1980, which for years defied efforts to control it.These examples strike us as uncomfortably inapt. While the national political system was unable to resolve the conflict over slavery, regional political majorities existed to support coherent action. It was these irreconcilably regional majorities that resulted in the Civil War. The upheavals of the 1960s were resolved by the emergence of a political majority broadly in favor of ending the Viet Nam War. And the double-digit inflation of 1979-80 was seen as destructive and intolerable to wage-earners, pensioners, and businesses alike, leading to Ronald Reagan's landslide election in 1980, with a broad mandate to fix it by any means necessary.
The conceptual problem is simple: revenues must be increased, or expenditures cut. But the gap is so great that any increase in revenue sufficient to solve the problem would require tax increases to levels that are unprecedented, punitive, and destructive, imposed on a narrowing base. And substantial political majorities either already depend on Government support, or anticipate relying on both Social Security and other benefits, principally assistance with medical care. Thus no substantial reduction in expenditure is politically feasible.
When investors begin to balk at purchasing ever-increasing volumes of federal debt, the Government's only recourse will be monetization of further debt, by sale of Treasury securities to the Federal Reserve Bank (a process that has already begun), in return for Federal Reserve Notes, that is, cash created by the Fed. The substantial and accelerating increase in the supply of money will result in uncontrolled inflation.
Labels: End Times