Default Could Loom as a Possible Outcome of America’s Onrushing Debt Disaster, If FDR’s Example Is Any Guide

Successful democracies endanger their success because of the complacency success breeds. They solve problems only when lashed by necessity: Britain considered Winston Churchill a Cassandra — until the German army reached the English Channel ports. In the 1960s, Americans realized they could not have domestic tranquility without new civil rights laws.Today’s crisis of the nation’s fiscal trajectory elicits a peculiar optimism: Necessity, in the form of the exhaustion of the Social Security trust fund, will lash Congress into reforming two entitlement programs (Social Security, Medicare) that are driving the nation’s indebtedness.This optimism is delusional. To understand why, read a recent lecture on “The Fiscal Future” by a Harvard economics professor, N. Gregory Mankiw, the former chairman of President George W. Bush’s Council of Economic Advisers.There are, he says, five ways to “stop this upward trajectory” of debt: extraordinary economic growth, government default, large-scale money creation, substantial cuts in government spending, and large tax increases. The probability of each is low.Extraordinary growth? The internet managed to “revolutionize” work and leisure without igniting extraordinary economic growth. Coming innovations (e.g., artificial intelligence, biotechnologies) will be life-changing but are unlikely “to establish an entirely new growth path.”Government default? The United States “is not immune to the political and economic forces that can make default an attractive option.” When Franklin D. Roosevelt took the nation off the gold standard, many American bonds had clauses ensuring their value in gold bullion. FDR abrogated those clauses. Although the Supreme Court upheld (5-4) his power to do this, it was, Mr. Mankiw says, “without doubt” a default.In 2016, candidate Donald Trump, in an exchange with a reporter, was asked how he would handle the national debt. He answered: “renegotiate” it. “You go back and you say hey, guess what, the economy crashed, I’m going to give you back half.” Mr. Trump, Mr. Mankiw notes, has shown “that he is willing to expand the Overton Window (the range of policies and arguments deemed acceptable in political discourse). Remember this exchange the next time someone says that a default on U.S. government debt is unimaginable.”Large-scale money creation? This would be intended to fuel inflation, which is slow-motion repudiation of debts. Bondholders are paid back in dollars worth much less than those they used to purchase the bonds.Substantial spending cuts? Remember Elon Musk’s United States DOGE Service. Its role in the firings of federal employees was entertaining theater, but compensation for civilian government employees is only about 4 percent of the government’s budget. Mr. Mankiw: “Federal civilian employees made up about 4.5 percent of the economy’s total nonfarm employment in the 1950s. Today, it’s under 2 percent.” Significant spending cuts can only come from Social Security and health programs. Good luck.Large tax hikes? Closing the fiscal gap between outlays and revenue would require, Mr. Mankiw estimates, increasing overall tax revenue 14 percent. Economically, this is, he says, “entirely feasible.” But politically? Mr. Mankiw: “There is now a bipartisan consensus about a central tenet of tax policy. The Republicans don’t want to raise taxes on anyone (except universities with large endowments). The Democrats want to raise taxes only on the richest 1 percent. So, the two parties essentially agree that 99 percent of Americans should not have to endure higher taxes.”Today’s national debt is an immense intergenerational transfer of wealth from unborn future Americans who will inherit the debt obligations to today’s consumers of government goods and services. The political class is more united by class interest than it is divided by ideology. Politicians and their constituents enjoy having huge deficits throughout the business cycle.Mr. Mankiw believes a large tax increase is “inevitable,” and he recommends a value-added tax, which most nations have. He warns: “Change might occur only when the bond market loses faith in American political institutions.”Optimists believe change will come soon. The reform-forcing event supposedly will occur by 2033, when Social Security’s trust fund will be exhausted: Without reform, benefits will be cut by more than 20 percent. Yet that happening is not believable. With just a few words, the law can be amended to say that Social Security’s revenue shortfall will be filled with general revenue, which means enlarging the now-constant borrowing binge.Those amending the law will dismiss worries that the bond market will demand much higher interest rates. They will reassuringly say this has not happened during decades of promiscuous borrowing. Mr. Mankiw, however, reminds us of an axiom: “In economics, things take longer to happen than you think they will, and then happen faster than you thought they could.”The Washington Post

Default Could Loom as a Possible Outcome of America’s Onrushing Debt Disaster, If FDR’s Example Is Any Guide

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