So the Stanford prison experiment that has been running in Washington for the last two years isn’t over. Voters didn’t let either President Obama and Senate Democrats or the House Republicans out of the basement, and it still isn’t clear who are the prisoners and who are the guards. Since the balance of power is unchanged, and everybody is about to become much crazier, the most consequential political work of 2013 will be done 300 miles due west of the capital, near the Ohio border, in Parkersburg, W.Va.
That town (population 31,000 ) is headquarters for the Bureau of the Public Debt, an obscure Treasury shop in charge of borrowing the money the federal government requires to operate day to day. It was relocated to the sticks in the 1940s in the event of a Soviet strike on D.C., which reflects its importance to American life, even if nobody has ever heard of it. Today the bureau’s 2,000 employees sell bills, notes, and bonds; redeem those securities when they come due; and pay out interest on the outstanding debt held by investors—now standing at about $11.5 trillion, not counting the IOUs held inside government accounts. Amid these transactions, about $72 trillion in cash flow runs through the bureau every year, about $89 billion daily.
The Treasury now wants to rename the bureau the Fiscal Service, and if the new label evokes the Treasury agents who protect the president, perhaps it isn’t a coincidence. Economically speaking, at least, the Fiscal Servicers have jobs just as dangerous and risky as those in the Secret Service. The political class is calling upon these 2,000 people to do the impossible—namely, to keep the promises we have made to ourselves without actually paying for them, indefinitely.
An Alexander Hamilton or a Pierpont Morgan couldn’t perform such a miracle—no one can—which means that eventually we must decide to make substantial changes to government so that it is affordable or increase tax collections substantially to finance it, if that is possible. Even the politicians most committed to the status quo can feel this reality creeping in around the edges, ominously. The country is entering a period of volatility and confusion that will challenge both parties and force both to make some startling ideological reversals—though not just yet. Thus the coming political year will be dominated by the familiar division, obstruction, and grand mal hysterics, but very occasionally interrupted by moments of insight and recognition.
One of them belonged to Obama, at his first press conference after the reelection. He committed to “start bringing down our debt. I’m confident we can do it, and look, I’ve been living with this for a couple years now. I know the math pretty well. And it really is arithmetic, it’s not calculus.”
Obama’s tutorial concerned the simple matter of higher taxes on the wealthy, which he (and they) will get, one way or another. After all, it was the only tangible policy agenda he campaigned on, and House Republicans will eventually sue for peace. The GOP lost a winnable election as soundly as it possible to lose in a centrist, moderate country. If continuing to control the House is a consolation prize for losing the presidency, all in, they lost the popular vote for the House by quite a lot. They have no political leverage.
As the Republicans recuperate from this blunt-force trauma, the major reinvention the political establishment claims the party needs in the backwash of 2012 will probably never arrive. It is too convenient to blame Mitt Romney, who at this point appears fairly pathetic—the supposedly data-driven technocrat who was genuinely shocked by the results on Election Day. Conservatives tend not to believe their agenda was repudiated because Romney ran until the very end a content-free campaign organized around his business biography, and he left no impression whatsoever on their way of thinking. He has no political legacy, apart from the Massachusetts prototype for the Obama health plan.
That said, the party will turn in stages to a more practical and pragmatic posture. Powerlessness corrupts, too. When Republicans were a rump post-Bush minority, and then running one half of one branch of government, they could propose whatever they wanted, no matter how unrealistic. Obama would never agree to any of it, but then he might be returned to private life. Now that they face another four years of stasis and frustration, they will likely moderate their ambitions, or at least mount fewer charges into fixed bayonets.
The accommodation will begin on taxes, given that Republicans cannot otherwise avert the combination of automatic tax hikes and automatic spending cuts known as the fiscal cliff. That ruinous outcome was supposed to be the incentive for the “supercommittee” to come to a modus vivendi on the budget after last year’s debt impasse, but its members deadlocked anyway. Washington will likely agree to avoid this fiscal cliff by creating a new supercommittee and another fiscal cliff. When that fails too, they will do the same, and then one more time …
The parties can only seem to agree on the terms on which the debt debate will continue because they both hold deep, strong, and incompatible convictions about spending and taxes. For several generations they have done what comes naturally and compromised by satisfying both tendencies at once: offer ever-more-generous benefits and services without ever securing the financing to make good on them, while simultaneously sanding away taxation. Washington is so psychologically unstable today because everyone is gradually coming to understand that the business of government will be the allotment of fewer resources, not more. Meanwhile, voters have never expressed a clear preference for raising unpopular taxes or cutting popular programs, and why should they? We’re getting government at a discount.
Things are starting to change because, as Obama put it, the math is brutal and unforgiving. Outlays have exceeded revenue in all but five of the last 47 years, and the former have jumped 151 percent over the last 15 years, the latter only 59 percent. The Fiscal Servicers are now borrowing to cover between 30 and 40 cents of every dollar we spend. Debt as a share of the economy was about 40 percent in 2008 but will reach 70 percent by the end of the year, the highest percentage in U.S. history except for the World War II peak of 109 percent. Inside of a few years the federal fisc will enter the debt-to-GDP danger zone of 90 percent, where economists say the economy starts to stagnate and decline.
World War II required a total financial mobilization to win a war for civilization across the planet, but the modern problem is the exponential growth of the entitlement state: Medicare, Medicaid, and Social Security most of all, plus interest on the debt. In 2012, the White House budget office estimates, the U.S. spent more on debt service ($224 billion) than on transportation ($102 billion), education and job training ($139 billion), scientific research ($30 billion), or veterans benefits ($129 billion). The government rolled up another $1 trillion—plus deficit for 2012, which was the highest in the postwar era aside from the previous three years.
A trillion dollars—a million million million dollars—is beyond human comprehension. Harvard’s endowment is about $32 billion and Yale’s is $19 billion, which took four centuries to accumulate. Spend $10 million every day, and it will take 273 years to spend $1 trillion. And Medicare’s unfunded liability—the gap between future benefits and the money to pay for them—is about $30 trillion, give or take a few trillion.
There are plenty of causes for optimism. America is a big country, a very rich country, one that can buy a lot of government. Interest rates are low, for the time being. And bond markets can tell the difference between good debt to fund a credible long-range plan to solve our fiscal problems and bad debt to spend a few more years ignoring them.
But at some date the Fiscal Servicers in Parkersburg will power up their computers and find that no one is willing to buy Treasuries at auction, or only at very high rates—and maybe sooner than anyone thinks. Almost half of the debt rolls over every two years, which exposes the U.S. to a crisis; short-term debt is what brought down Lehman Brothers. The loss of investor confidence is sudden and selfstoking. As Lord Keynes had it, markets are beauty contests where the goal is to pick the contestant the other judges think is most beautiful. A sovereign-liquidity crisis would inevitably lead to a political panic and broader financial-market turbulence, each compounding the other.
Most Republicans, especially in the House, genuinely believe that their existential political purpose is to prevent such a calamity, which is why they can be so truculent. But as 2013 wears on, and they find they can’t reduce spending by enough, many of them will start to dump their antitax absolutism. They won’t want to, of course; they’ll hate it, but then they’ll look at the staggering numbers coming out of Parkersburg and conclude that the only responsible and realistic fix in the Obama era is higher taxes. The revival of the party’s pre-Reagan greeneyeshade wing is coming, which will lead to a revolt and furor that will make George H.W. Bush’s read-my-lips mutiny look like regular order.
As for the Democrats, their own reckoning will be equally unpleasant as the Fiscal Servicers continue to beaver away. The bad news will begin in 2013, when taxes increase on singles earning more than $200,000 and couples above $250,000 and the Fiscal Servicers are still asked to finance immense deficits. The percentage of Americans making over those thresholds amounted to about 3 percent of tax filers in 2010, the latest year for which Internal Revenue Service statistics of income data are available. Only about 281,000 people reported income above $1 million, earning about $971 billion altogether. So the government could confiscate the wage and investment income of every millionaire and billionaire in America and it wouldn’t cover the budget deficit. Merely returning the top tax rates to their Clinton-era levels and above will be an important truth-in-advertising experiment—math, again.
The truth is that the rich aren’t nearly rich enough to fund the government we have, whatever Obama’s theological tax convictions, and if it remains unreformed, the money will have to be extracted from the middle class. The irony is that this could lead to a liberal volte-face on entitlements, in spite of everything.
Obama campaigned as the tribune of an unreconstructed Medicare and Medicaid, denouncing Paul Ryan’s plan to introduce more competition and choice into the programs as virtually un-American. But breaking promises is what politicians do; Obama unequivocally opposed an individual mandate to purchase health insurance or else pay a penalty as a 2008 primary candidate, only to turn around and include one in the Affordable Care Act.
Endorsing a mild version of Ryan’s “premium support” wouldn’t require Obama to abandon his progressive convictions and goals, simply to use market methods to achieve them. Some of the White House’s favorite health-care economists, including David Cutler of Harvard and Jonathan Gruber of MIT, have already done so, along with its brain trust, the Center for American Progress. What they may be coming to recognize is that asking the most affluent and educated Americans to demand value in health care, and save for their own retirements, is the only way to make the entitlement state work better and put it on a path to solvency.
Democrats for entitlement reform and Republicans for tax increases? Well, maybe, and not all at once. America is not only a big and rich country but a lucky country, and 2013 may get down to defining how lucky we deserve to be. The status quo can’t last. Oh, and by the way, a nonprofit outfit called the Partnership for Public Service ranks the Bureau of the Public Debt the sixth-best place to work in the federal government, out of 224 agency subcomponents. That won’t last either.
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