Macleans on fragile US Economy

Macleans is running an article about the current unsustainable fiscal policy in the US.

I originally saw this on Bound By Gravity. He’s asking for some comment from any economists or others with a different point of view. Please go visit if you’d like to comment.

Udpated 2 times

You may look at that headline and say, “Oh, here we go for more America bashing” but no, this is not about deriding America, it’s about being hyper-aware of what’s happening in the economy of our largest trading partner. If all the deficits, and debt and tax cuts eventually catch up to the US economy and lead to a recession, then Canada will be going along for the ride no matter how good our fiscal plans are.

While it was more of a “sub-reason” than an issue at the forefront, this is another justification for opposing the war in Iraq and the massive military buildup occuring in the US. Billions and Bilions of dollars are being pumped into the military when they should be spent on shoring up the economy and diminishing their reliance on foreign capital.

This quote really says it all:

But Walker isn’t a lobbyist or an activist, he’s an accountant. His title is comptroller general of the United States, which makes him the head auditor for the most important and powerful government in the world. And he’s desperately trying to get a message out to anyone who’ll listen: the United States of America’s public finances are a shambles. They’re getting rapidly worse. And if something major isn’t done soon to solve the country’s intractable budget problems, the world will face an economic shakeup unlike anything ever seen before.

Go read the rest!

A particularly stunning part:

Walker’s department projects that, under the current tax rates, interest costs on the skyrocketing national debt would be about half of all government tax revenues by 2031. Ten years later, the cost of servicing the debt will exceed all government revenues.

That means that if nothing changes by 2040 (when I’m 73) the US won’t be able to collect enough taxes to even pay interest on its’ Debt!

Now obviously that is not going to happen because at some point the people lending the US its’ money will simply stop. The banks would obviously slap me down if I just kept borrowing and borrowing and never repaying. Someone needs to get the USs’ Fiscal House in order… and it looks like it will be the American Taxpayer that will have to realise that they have to pay more if they want their economy to have any chance.

Update:

A little more doom and gloom for you. This time from Alan Greenspan himself.
Matthew Yglesia points to todays testimony by Alan Greenspan

the positive short-term economic outlook is playing out against a backdrop of concern about the prospects for the federal budget, especially over the longer run. Indeed, the unified budget is running deficits equal to about 3-1/2 percent of gross domestic product, and federal debt held by the public as a percent of GDP has risen noticeably since it bottomed out in 2001. To be sure, the cyclical component of the deficit should narrow as the economic expansion proceeds and incomes rise. And the current pace of the ramp-up in spending on defense and homeland security is not expected to continue indefinitely. But, as the latest projections from the Administration and the Congressional Budget Office suggest, our budget position is unlikely to improve substantially in the coming years unless major deficit-reducing actions are taken.

This guy really is the most powerful man in the world, isn’t he.

Update 2:

One more thing. We all know that these problems are in large part due to the aging Baby Boomer population around the world. Well, according to Eschaton, President Bush has backed down on his massive reform of the US Social Security system. What does this mean for the economic prospects of the US going forward? Hard to say, but at least it seems Bush has realized that his grand scheme of tax cuts+personal “accounts” just won’t work to save Social Security… or save the US from Social Security itself.

13 thoughts on “Macleans on fragile US Economy”

  1. Thanks for the budget advise, Chris but I’m afraid we will not stop spending money on the military just to please Canada and the Euros. Just cuz ya’ll did doesn’t mean it was wise. You just never cease to amaze me – your search to save the US and to get our priorities right is impressive.

    Here’s some thoughts from Victor David Hansen regarding defense spending and other economic realities for Europe. Very interesting read (See the post at the Chrenkov site titled “tottering Europe):

    “Look, the more we talk about past “shared values” and a once “common heritage,” the more we know the present problem: a postmodern Europe doesn’t want to spend any money on defense, and is furious that the US doesn’t follow its multilateral lead in a policy that could be described as moral sanctimoniousness while millions die and the West totters—whether that is a matter of Milosveric, Darfur, the Taliban, or Saddam.

    So we are on to them at last; here is the rule regarding these strange folk who peddle weapons to communist China, whitewash Hizbollah, fund Hamas, and looted Iraq: the degree to which Europe is amoral by either its commission or negligence is directly proportional to the degree we see in its media and state spokesmen moral posturing and invective against the United States.

    So… we sit tight, praise them, and keep our powder dry, looking to see the fall out from Islamicism on their shores, and whether they curb anti-Semitism, get their birthrates up, rearm and make a real alliance, avoid antagonizing a surrounded Russia, and buy off an Iran or crazy former Soviet Republic. We cannot do much in all that and so should expect very little from them and get ready for some pretty crazy things coming out of Europe in the next few years. NATO as we know it is dead, and we have no idea what will follow—so we praise it to the skies.

    Europe today lives in a post-modern world where war and conflict are vestiges of the past – none of this is a bad thing in and of itself of course – but applying this model outside of the EU is beyond foolish. The rest of the world is a nasty place still – with folks like Saddam or Kim who do not play by your rules.
    Either “Old” Europeans will wake up to this truth or not – either way the rest of us ( the CoW )should not be expected to treat this position with respect when it collides with reality. “

  2. It’s not about spending less money to appease me or anyone else Jane.

    Yes of course Europe and Canada share problems of overspending and aging population… but if the US goes into a recession, it doesn’t matter how much we or the Europeans do to protect ourselves, we will inevitably be dragged down with you.

    If you read both the Macleans article and Greenspans testimony you will see that even if there was no spending on the Iraq war, the economy would still be headed in the wrong direction.

    This isn’t coming from me Jane. This is coming from Alan Greenspan and David Walker. Two of the most influencial and knowledgeable people in the US Fiscal arena.

    Why *do* you need such a huge military anyway? What threat is the US facing that requires that amount of hardware and personnel?

    If you say “War on Terror”… then remember that Canada, Europe and many other countries with far inferior militaries are fighting the “War on Terror” as well.

    Armies are not deciding the outcome of the “War on Terror”… police agencies, immigration officers, and cooperation between nation is what is making the biggest difference. That is how people are being arrested in London, Berlin and Madrid. There are no soldiers there. Yes Afghanistan required military intervention… but on a small scale. Nothing near the overwhelming war machine deployed in Iraq.

    The War on Terror is being won because Arafat died and Hariri was assassinated. No bullets were fired.

  3. Yeah, I know. I was deliberately obfusticating wasn’t I? But VDH is so billiant I was compelled to throw him in. Juan Cole is your historian, VDH is mine.

    Anyway I don’t believe that we will have economic collapse despite Macleans report. (I can’t read it from the office computer as I’m blocked from practically anything interesting due to company filters. I guess they don’t think Murkyview is a diversion for me YET! I no longer can access LT SMASH here at the office anymore.) After all we paid for WWII when we were broke, the VNW, the Great Society and the War on Poverty (thanks LBJ) and the abyssmal Carter economy when my grocery bill doubled every two weeks – I remember double digit inflation all too well! (thanks Jimmah). So I’m not really worried. Chicken Little isn’t right very often, I’ve noticed. 😉

    Anyway I will try to read the article this evening if I can get hubby to give up HIS pc for awhile.

  4. Hahah. Maybe being hosted by a public institution isn’t so bad after all.

    I agree that the sky isn’t falling… but what *is* clear is that economies work in cycles, and it seems that we are nearing a new phase of that cycle, so things had better change if we want to mitigate the effects.

  5. Chris

    “Why do you (the US) need such a huge military?”

    Well, as VDH says in his comments above, there are bad people out there who want to hurt us. Euros see no enemies and foolishily want to translate that sense of false security into their relationships with other less moral and benign nations.

    Here are a few facts I got from the CIA website dedicated to facts about every conceivable country in the world. This reveals as of 1/1/04 what % of GDP and amount in dollars various countries spend on their military:

    US 3.3% 370 Billion;
    Can 1.1% 9 B;
    Fran 2.6% 45 B;
    Ger 1.5% 35 B;
    UK 2.4% 43 B;
    SP 1.2% 10 B;
    It 1.9% 28B;
    Rus no infomation available;
    Jap 1% 42B;
    China 3.5% – 5% 60 B;
    India 2.4 % 14 B;
    Iran 3.3 % 4B;
    Egypt 3.6% 2.5 B;
    Syria 5.9% 1 B;
    Pak 3.9% 3 B;
    Jordan 20.2% 2B;
    Saud Arab 10 % 18B;
    Israel 8.7% 9B;

    As you can see the US spends a relatively small % of it’s GDP on military, granted it’s far more in actual dollars but nevertheless our greatest government expenditures are for social welfare programs.

    It’s also interesting to note that the developing countries and ME countries are spending double and triple percentages over the Europeans. That fact alone shoulc give you some cause for concern. Those nations are choosing to sacrifice far more than Europeans are to maintain a comparatively strong military. Perhaps they have their eyes on external threats, do you think?
    Why does Europe feel so safe? That’s what I wonder.

  6. Euros see no enemies and foolishily want to translate that sense of false security into their relationships with other less moral and benign nations.

    Perhaps you could provide a cite for the claim that `Euros see no enemies’. It is a strange claim. Europeans have been fighting terrorism since before the US was trying not to enter WWII. Most of the recent wars which have drawn in western nations have happened much, much closer to home for Europe than to the United States. Perhaps you could provide a quote from the EU explaining that there are no enemies in the world?

    As to the numbers, percentage of GDP as a comparision for military spending doesn’t make much sense – why should military spending be compared to largely private sector spending? Is private spending on consumer goods really a good basis for deciding how much to spend on the military? Percentage of government spending, perhaps, or per capita.

  7. All the rhetoric coming out of the EU regarding foreign relationships, the role of the UN, the vision for the future supports my observation that the Euros only plan for national defense is based on talking, committee meetings in the centers of power and and all nations with a less than robust military prepared to deal with all international problems by sanctions alone which don’t seem to work very well as far as I’ve seen. They certainly didn’t want to know about Bosnia or Kosovo (the UK excepted) right in their own backyard until the US once again took the lead in NATO.

    They see no genocide in Dafur for instance and refuse to act militarily to stop the senseless killing. Talk, talk, talk while fathers, mothers, children,and grandparents are slaughtered.

    I’m not going to cite something that I read in all the papers and listen to on various news programs. If you don’t like the stats I cited it’s what the CIA uses for comparison. Do your own research if you want more meaningful numbers. Everyone knows that the Euros spend a miniscule amount of money on their militaries.

    They made that decision all during the COLD WAR – let the US do the heavy lifting was the consensus. Now we don’t want to do it anymore so they are left to their own destiny. We’ll be bringing home our 70,000 troops soon so when the bogey man arrives, call Canada, not the US to save their hides.

  8. Jane:

    No, really, just one citation somewhere of a European official saying that there are no enemies would be enough. You can surely find one single quote from somewhere in `all the rhetoric’ and `all the papers’ to back up your claim. Unless, of course, your claim that the Europeans don’t see any enemies is just made-up nonsense. (Why do the Europeans spend *any* money at all on the military if they see *no* enemies? Puzzling.)

    As to the horrors of Sudan, the UN didn’t see genocide there because genocide is a particular sort of atrocity with a specific meaning, not a word to be used as a catch-all for large-scale enormities. Why do you lambast the UN for not labelling this particular horror a Holocaust- or Rwanda-style genocide? Isn’t calling it what it is — mass murder and the spreading of rape, terror, and mutilation among innoccents — enough? Why do you think that adding another label, and one that doesn’t really apply in this case, would make things better?

    Sadly, *no* one is acting in Darfur; the `Euros’ aren’t alone in this, the `Dollars’ aren’t acting either, and a re-wording of the monstrous atrocities isn’t going to change this. At least the European nations are leaning on the Sudanese government to call off the jangaweed; it isn’t nearly enough action, but is more than anyone else is doing.

  9. “But what really concerns me is Europe. Europe’s armies were designed for static defense against the Soviet Union. But the primary security challenges to Europe today come from the Middle East, Central Asia and Africa. If you put all the E.U. armies together, they total around two million soldiers in uniform – almost the same size as the U.S. armed forces. But there is one huge difference – only about 5 percent of the European troops have the training, weaponry, logistical and intelligence support and airlift capability to fight a modern, hot war outside of Europe. (In the U.S. it is 70 percent in crucial units.)

    The rest of the European troops – some of whom are unionized! – do not have the training or tools to fight alongside America in a hot war. They might be good for peacekeeping, but not for winning a war against a conventional foe. God save the Europeans if they ever felt the need to confront a nuclear-armed Iran. U.S. defense spending will be over $400 billion in 2005. I wish it could be less, but one reason it can’t is that the United States of Europe is spending less than half of what we are. And the U.S. and E.U. really are the pillars of global stability.”

    Thomas Friedman, NYT, Mar 6, 2005

  10. Jane:

    And why would the Europeans, or anyone else…

    A) Ever need to fight a conventional war in Iran?

    B) Ever need to “confront” a Nuclear Iran.

    You’re making it sound like you’re expecting a confrontation with Iran, but lets look at it another way.

    When was the last time Iran attacked, or invaded, anyone?

    I believe it was Saddam who invaded Iran and started that war.

    I don’t know of any other wars in which Iran was involved, and they have never, in all their rhetoric over the past few months, never suggested aggressive action against one of their neighbours, or even the US.

    I’m not apologizing for the Iranians and their lack of willingness to cooperate with the IAEA, but the fact is, they have never threatened anyone overtly with their conventional military…

    You say the Middle East is a threat to Europe?

    Again, what country in the Middle East is threatening Europe militarily? Turkey is doing everything it possibly can to BECOME part of Europe. Iraq was never a threat and is even less so in a military sense… Syria? They have a bunch of Russian missiles… but are they alone a reason for greater military spending in Europe? The Syrian armies would probably fall to pieces like the Iraqis did and the Baath would retreat into insurgency.

    Africa?
    Again… where is the need to fight a large conventional war? Name one country that you feel could or would require an invasion in order to effect change.

    It’s ludicrous. There is no need, in this day and age of modern military warfare, to have a huge conventional force able to invade and control entire countries.

    It just doesn’t make sense, and rather than decreasing the possibility of conflict, it increases it because countries like Iran and Syria and North Korea feel threatened enough to build up their defenses even though in any real conflict they’d be absolutely hopeless.

  11. Well, Chris, I’ve been speaking generally of “murky” future threats while you are putting words in my mouth. All I know is that militarily Europe is unprepared to defend itself – from who I don’t know but I feel certain if things are left as they are, someday they will be very sorry not to have a modern military. I’ve reread my remarks and the quotes I given in response to a challenge to prove that the Euros don’t see any threats worth being armed for. You just proved my point if you’re speaking as an “Euro” which essentially from a political perspective you are.

    The Euros are depending on “soft power” by choice. Otherwise they have less money for the welfare state and short work week they love so much. That is their choice. You, like Euros, want to believe that Iran and NK are just nice happy little countries who pose no menace to their neighbors or more distant regions such as Europe. Ok. Whatever. You, like so many of your politcal perspective, are in the first rank of those who excel at rationalization. If you aren’t afraid of Iran, then good for you.

    This thread started with your question as to why the US needed such a gosh darn big military and I explained to the best of my ability and more eloquent spokespersons can why it is so.

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