Budget Deficits Have Consequences
It's New Year's Eve, on the threshold of the second decade of the 21st Century. Like the champagne that will be flowing liberally tonight, congressional spending has no limits.
Billions of dollars for emergency housing here, for health "reform" there, for the alternative energy needs of developing countries everywhere. By the administration's own budget projections, government debt as a percent of GDP will equal 77% in 2019. An unsustainable share of government spending will be dedicated merely to paying interest on the debt.
Excessive spending, like too much champagne, has consequences: a permanent drag on future economic performance, burdening future earners with higher taxes to repay the debt, and with higher interest rates on their own mortgages and credit cards.
Although the administration and Congress pay lip-service to lowering the deficit - President Obama reportedly plans to make fiscal responsibility a theme of his State of the Union address next month - neither has shown practical signs of putting spending cuts into practice. Mr. Obama wants to spend repaid funds from the $700 billion Troubled Asset Relief Program on so-called jobs programs. Congress has projected $500 billion in Medicare cuts to fund health "reform," cuts that have never before materialized.
On Christmas Eve the Senate joined the House and voted to raise the debt ceiling by $290 billion. That sounds like a large amount, but it's only enough to last Uncle Sam until mid-February. In order to fund the government through the end of the 2010 fiscal year, Congress would have had to raise the debt ceiling by $1.8 trillion. Democratic leaders wanted to raise the ceiling by the full amount, to avoid revisiting the issue during 2010, an election year, but cost-conscious Republicans and Democrats objected.
The debt limit is the last semblance of fiscal responsibility for a Congress that has essentially abandoned it. But the effort was only a fig leaf, a pretence at budget control, immediately circumvented by the administration. Just after the debt ceiling increase, the Treasury announced, without consulting Congress, that Fannie Mae and Freddie Mac would get unlimited funding for the next three years for emergency aid to the housing market, "to assure markets of the government's support."
The translation of bureaucratic prose into ordinary speech is quite simple: the administration does not feel bound by congressional debt limits. It will spend as it sees fit. The next time Congress considers raising the debt ceiling, a few members may wonder aloud what difference the debt ceiling makes when the administration brazenly ignores it.
It's not as if Fannie and Freddie have no money authorized by Congress. So far they have been allocated $400 billion for emergency housing loans, of which $111 billion has been spent. That means that the two government-sponsored enterprises already have congressional authority to spend an additional $289 billion. Now the administration finds that this is not sufficient, and the agencies can spend as much as they like even without congressional authority.
One area where Congress has been less than indulgent is CEO pay, holding hearings to lecture bankers and auto executives. Curiously, the CEOs of Fannie and Freddie recently were awarded-or perhaps more accurately, rewarded themselves-$6 million pay packages.
These CEOs may also want to avoid meeting with pay czar Kenneth Feinberg. Mr. Feinberg set the cash salary ceilings for the CEOs of GM, GMAC, AIG, and Citigroup at $500,000. Mr. Feinberg and even Congress might be curious about how Fannie and Freddie manage their finances, spending money that Congress has never approved.
Congress has had some experience recently with the administration making grand promises to spend taxpayer money without hint of congressional approval. At the recent Copenhagen climate change talks, Secretary of State Hillary Clinton offered developing countries $100 billion a year starting in 2020 to develop alternative clean energy sources.
To be sure, other industrialized countries might be persuaded to pay a share of the $100 billion. But this financial commitment was made without any consultation with Congress. U.S. taxpayers are fortunate that China did not agree to the offer.
China, unlike Congress, has a real incentive to stop the hemorrhaging of federal spending. It is China that buys a large share of our federal securities issued for our borrowing to cover excessive spending. Unlimited federal spending means those securities, and anything else denominated in dollars, are worth less and less. America will become a less attractive place to invest, a less attractive place to work, a less attractive place for economic activity.
The Chinese government has recently observed that there is not enough demand for all of the planned new federal securities. Their value will falter, and with it, the American economy. Imagine that. We pride ourselves on having the greatest government in the world, one bound by checks and balances to prevent one branch of government from exercising too much power, or power unwisely. Yet the voice of reason that dares to say that our federal spending is out of control is not from the executive branch, Congress, or even the courts. It is a voice from outside our government, and even outside America.
This New Year's Eve, rather than champagne, our government leaders need a dose of hard reality about our fiscal situation.