For those of us who admire the United States and are hoping it will rediscover economic virtue and the road to recovery, last week was particularly unsettling. Both sides in the fight for the White House displayed an ignorance of fiscal issues more usually associated with contestants in a pub quiz. It was intriguing, however, that while Mitt Romney’s blunder made headlines across the globe, Barack Obama’s seemed not to disturb America’s mainstream media and went largely unreported beyond the US. The difference was that, whereas Mitt Romney impugned the integrity of millions of fellow citizens, dismissing 47 per cent of them as scroungers, the president merely insulted the nation’s collective intelligence — and almost no one seemed to care.
Romney’s observation was ridiculous: his group of alleged entitlement junkies includes pensioners, students, the disabled, many serving in the military and those on incomes too low to be taxed. For this, he was rightly pasted. By contrast, aside from the opprobrium of professional budget-watchers and diehard opponents, the man in charge of the world’s biggest economy emerged virtually unscathed from his casual confession on CBS that he did not know how much the US owes. It was a triumph of style over substance.
Asked by David Letterman on The Late Show to explain all those zeros on America’s debt clock, displayed at the Republicans’ convention, Obama replied: “I don’t remember what the number was, precisely.” Offering the president a clue, the veteran chat-show host suggested “about $10 trillion”, at which point Obama switched effortlessly to praising the budget surplus of Bill Clinton and sailed off to safety. It’s not as though America’s debt is a minor twinkle in a constellation of more serious problems. But not only was the president unable to recall the big number, he readily — perhaps deliberately — conflated the debt and the deficit.
For the record, US debt hit $5 trillion under Clinton, even though, to his credit, the 1999 federal budget was $76 billion in surplus. Not since Andrew Jackson, in 1835, has America been debt-free. A cynical man might conclude that Mr Obama knew all these details, but found dissembling a more convenient route out of trouble than discussing the fiscal horror that has unfolded on his watch.
The White House website boldly claims: “President Obama has led the way on structuring the government to live within its means.” This is not even remotely true. By any measure, the US continues to spend way above its income and, as a result, its debt position is deteriorating apace.
These are the facts. George W Bush left behind a set of books that were not so much unbalanced as vertiginous. At the end of 2008, US debt was $9.9 trillion, or 69.7 per cent of GDP, and the ballooning deficit was $683 billion. Since then, all the key indicators have worsened markedly. By the end of this year, gross debt is forecast to reach $16.3 trillion (the number to which Letterman was alluding), more than 100 per cent of GDP, or a rise of two thirds under Obama. The annual deficit is close to $1.5 trillion, 10 per cent of GDP. Worse still, according to official forecasts, US debt is on course to hit $20 trillion by 2016. If this is a country living within its means, one dreads to think what would happen if Washington decided to throw a party.
Debt excusers argue that this sharp rise in obligations is good economics. The government, they say, should pump up demand with borrowed money in bad times and then claw it back after the dark clouds have passed. The trouble is, that’s not how modern liberal democracies function. What begins as maximum government intervention quickly becomes the minimum acceptable, as the electorate demands ever greater handouts of somebody else’s money. Terrified of being rejected by voters who regard temporary help as permanent rights, politicians keep spending. I spoke recently to Robert Shapiro, a former Clinton adviser and Obama supporter, and even he admitted that US health care costs are in danger of running out of control and will have to be restrained. But who has the courage?
Romney’s number two, Paul Ryan, the Wisconsin congressman, talks tough on reducing Medicare and imposing a freeze on discretionary spending. But history teaches us that a Republican in the Oval Office is no guarantee of fiscal prudence. Soundbites are so much easier to deliver than sound money. For example, Ronald Reagan’s unfunded tax cuts and a rapid escalation in defence spending saw America’s debt all but triple during his time in office. George Bush Jr went down a similar road of tax cuts and military expansion and ended up in a similar place, with national debt rising by 75 per cent to reach that $9.9 trillion figure.
A recent study by Deloitte, the accountancy firm, concludes that America’s debate on the nation’s finances is largely superficial and the debt crisis far more severe than business leaders, policy-makers and the public realise: “The US,” it says, “is on track to spend at least $4.2 trillion in interest payments over the next decade… money that could otherwise be used to make investments to boost American competitiveness.”
This makes a sustained period of exceptional growth, which has rescued the country before, far harder to achieve next time. With nearly half of publicly-held US debt in the hands of foreigners, the borrow-to-consume game is almost up.