David Stockman on the looming federal debt crisis

David Stockman, an OMB director under President Reagan, wrote a lengthy, but worthwhile, piece in Politico this week, blasting the Washington, D.C., establishment for creating a disastrous fiscal mess.  He is pessimistic about our ability to get out of it, and I am increasingly coming to the view that some kind of fiscal and financial crisis is going to result.  I believe there is a small (10-20%?) probability that political leaders will engage in real leadership and do something to avert such a crisis.  Some tidbits:

The truth is that it’s “game over” with respect to the nation’s fiscal predicament. We are hurtling irreversibly toward a budgetary crack-up that will generate the mother of all crises in global bond and currency markets….

Indeed, lacking any coherent fiscally conservative opposition party, the nation’s finances have succumbed to the raw, parochial imperatives of organized lobbies and hometown industry. These primal political forces now heap fiscal largesse on clunker cars, random homebuyers, farm-belt ethanol plants and Wall Street bankers with bipartisan equanimity….

But after the Panic of 2008 there was no mysterious demand leakage — just the final exhaustion of a 30-year borrowing binge by households and businesses. So “counterfeit demand,” based on unsustainable borrowing that had swelled the boom economy, has now been irrevocably dissolved. This means that honestly measured gross domestic product is lower than before, and the nonbubble job count is about 20 million fewer (counting part-time and discouraged workers) than previously reported. Permanently adding trillions to an already staggering national debt, to re-create spending and jobs that were an illusion in the first place, hardly constitutes sound economic policy….

The collateral damage to the fiscal policy process from this Keynesian consensus, however, is palpable. At 15 percent of GDP, Federal receipts are at their lowest since World War II, yet both parties pile on jobs, housing and investment tax credits that further dismantle the revenue base. Similarly, spending is at an all-time high of 25.5 percent of GDP, yet white-elephant stimulus projects, such as high-speed trains that local taxpayers would never pay for, push the spending ratio ever higher….

Thus, the Obama budget assumes real growth of nearly 4 percent per year in an economy still listing from the collapse of a 30-year debt spree. More improbably, it assumes nominal GDP grows by 6 percent annually for five years — though the world economy is caught in a powerful deflationary downdraft, and nominal U.S. GDP has not grown at anything close to a 6 percent rate since early 2006, before the day of reckoning arrived.

The laws of compound arithmetic extract a painful toll when these numbers are reset to more realistic values. Nominal GDP could easily grow at only 3 percent, meaning the size of the U.S. economy forecast for 2015 is overstated by $2.5 trillion and Federal receipts by $500 billion annually — while spending is probably understated by several hundred billion more. Thus, adjusted to real-world assumptions, the White House budget projects a $1.5 trillion deficit out as far as 2015, and $10 trillion of incremental bond finance in the interim….

And finally, ending on a pessimistic note:

After 30 years of evisceration, the ingredients for successful fiscal governance are gone. The current drift toward doomsday is likely irreversible.

I am starting to warm to the idea of a tax on financial transactions (trades in stocks, bonds, currencies, derivatives), also discussed in the article.  It probably won’t hurt the efficiency of the markets much at all, it might reign in some of the more useless speculation, and could bring in a large amount of revenue.  Chance of this happening: < 5%, in my opinion.