Debt Tantrum on a Sinking Ship
Posted Jul 26, 2011 by Richard Heinberg
President Obama and House Speaker Boehner are both right, but they’re both tragically wrong. And unless they can somehow wake up and see why they’re wrong, we all lose—big time.
Let me explain. But to do so will require setting three levels of context.
The immediate context is of course the fact that Republicans have created a political crisis by refusing to raise the nation’s debt ceiling unless they achieve their priorities of dramatically reducing government spending—primarily on social programs.
A larger context is the fact that the U.S. is still reeling from an epic credit crunch. During the past decade, home prices were bid up to unrealistic levels and the financial industry magically and dramatically expanded the resulting bubble with the helium of securitization and derivatives. When the bubble popped, government bailouts and stimulus packages were deployed to prevent bank failures and help stanch the exploding levels of unemployment.
The even bigger, and most important, context is that we are entering a new historic era. Oil prices are high due to the ongoing depletion of giant, easy-to-produce oilfields discovered back in the 1950s and ’60s, and the substitution of expensive oil from deepwater drilling and tar sands. Other non-renewable resources are also becoming scarcer. On top of that, the climate is changing and weird weather is helping drive up food prices. Oh, and let’s not forget, the oceans are dying. Altogether, it seems reasonable to conclude that economic growth—fueled during past decades by cheap energy and raw materials, but also made possible by a stable climate—is coming to an end.
So here we are, facing an enormous, unavoidable long-term problem (the need to transition the economy to a sustainable post-growth mode while minimizing the human suffering that is likely to ensue in the interim); a medium-term need to deal with a recession that could at any moment relapse to 1930s levels; plus an optional short-term crisis (the fight over raising the nation’s debt limit).
Okay, that’s enough context. Let’s view the arguments of both sides from this expanded perspective.
Republicans say that more government debt is unsustainable. If we keep piling it on, we’ll eventually get to a point where all government revenues are eaten up by interest payments. We have to get off the deficit treadmill now; if we do—if we downsize government by shrinking the federal budget—we can free private enterprise to create jobs and grow the economy.
Democrats agree that spending needs to be controlled, but argue that overly ambitious spending cuts will undermine the recovery. Government has a necessary role in priming the nation’s economic pump during a recession. At the same time, the super-rich—who benefitted so much from Bush-era tax cuts and are sitting on enormous piles of cash—should be helping the nation make ends meet.
These two perspectives are irreconcilable. Ironically, though, they’re both right. Debt will overwhelm us. Reducing government spending will cause the economy to relapse. But they’re also both wrong. Reining in government won’t automatically cause the growth of private enterprise. Yet neither will more stimulus spending. With high oil prices, falling home values, an aging work force, and maxed-out consumer debt, there’s just no basis for a self-sustaining U.S. economic recovery.
The reality is that we now have a post-growth economy, whether we like it or not. Adapting to this new reality will require more of our leaders than political theater, name-calling, and blame-gaming. Radical adjustments to our economy are required—even more radical than a sovereign debt default. We’re going to have to rethink the economy’s goal (up to now its goal has been simply to grow). We’re going to have to engage in an honest national discussion about how much inequality is socially sustainable in a shrinking economy. We’ll have to re-invent money and finance so they’ll work in a non-growing economy. We must adjust to rapidly tightening energy and resource limits while dealing more effectively with the environmental consequences of our recent industrial growth binge.
That’s some serious work, and it will require cool heads and considerable intelligence. Are we, as a nation, up to it?
One would like to think so, but the signs emanating from Washington right now are not encouraging.
Richard Heinberg is Senior Fellow-in-Residence at Post Carbon Institute and the author of 10 books, including The End of Growth: Adapting to Our New Economic Reality (Aug 2011).
image credit: Associated Press