Off the Fiscal Cliff, Into the Abyss
Without raising the retirement age, effective price controls in health care and torts reform, federal spending and the national debt will jet into the stratosphere. Mounting interest payments, investor reluctance to buy U.S. Treasuries and consequent draconian cuts in spending will thrust the U.S. into the crisis now gripping Greece and Spain.
More immediately, tax increases and spending cuts threaten a second recession, because President Obama and Congress failed to address dysfunctions that created the bubble and bust of the 2000s and make the economy perilously dependent on deficit spending.
From 2001 to 2005, the trade deficit doubled to more than $700 billion, thanks to subsidized imports from China, restrictions on U.S. sales into the Middle Kingdom and rising oil prices. This resulting loss of demand for U.S.-made goods and services should have instigated a recession; however, Chinese and Middle East oil exporters stepped up purchases of U.S. securities that helped finance questionable mortgages and other consumer debt.
Americans spent more than they earned, and the boom continued into 2007. When borrowers could no longer service debts, defaults and bankruptcies resulted and the economy crashed.A huge trade deficit with China and on oil continues, but now the federal government is doing the extra borrowing and spending to sustain domestic demand and modest growth. If budget negotiations slice $200 billion to $300 billion off the deficit, as is likely, GDP will contract $350 to 500 billion and unemployment will rise above 10%. President Obama and House Republicans indicate no interest in confronting China to force a more equitable trading relationship. Slashing oil imports enough requires the president to permit more drilling in the Gulf, off the Atlantic and Pacific coasts and in Alaska, and for Republicans to embrace alternative energy sources and aggressive conservation measures. Neither seems likely. Absent changes in trade and energy policies to boost domestic demand and growth, budget deficit reduction is not possible without another long, hard recession. And absent genuine deficit reduction, the nation is headed for economic chaos by the end of the decade. Follow @PMorici1 This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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