New York Times: Behold the spectacle of California
Kurt Brouwer July 10th, 2009
I don’t remember having read this author previously, but he writes very well. And, in this piece, he crafted one of the all-time great lines on the mess in California: “Behold the spectacle of California.” This piece uses the spectacle of California and its monumental mismanagement as a cautionary tale for the rest of the country. Read on [emphasis added]:Staggering Budget Gap and a Reluctance to Fill It (New York Times, July 7, 2009, Peter S. Goodman)
On one point alone, no debate is required: The United States already owes staggering sums of money and will soon owe more.
The Congressional Budget Office projects federal spending will exceed revenues by $1.7 trillion this year, or about 12 percent of the nation’s annual economic output - the largest deficit since World War II.
“The budget outlook at every horizon is troubling,” declared Alan J. Auerbach, a finance expert at the University of California, Berkeley, and William G. Gale, an economist at the Brookings Institution, in a recent paper. “The fiscal year 2009 budget is enormous; the 10-year projection is clearly unsustainable; and the long-term outlook is dire and increasingly urgent.”
The budget office estimates that federal debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010. Merely paying the interest on this year’s debt will cost taxpayers $565 billion, or 4 percent of the nation’s annual economic output.
… Adding risk to the contemporary equation, a host of unknowns seems likely to increase federal spending. The Obama administration is seeking to expand access to health care while insisting that any new program be paid for, but estimates of costs diverge widely.
Taxpayers have allocated $700 billion to aid troubled financial institutions and automakers, with the expectation that some will be recouped through selling assets and stakes in bailed-out companies. But how much will be returned exactly is a major unknown.
…somewhere between here and infinity lies a point at which American debt reaches unsustainable proportions, at which investors will balk at continuing to finance the American expenditures absent a higher return on their investments. Then, everything could change quickly, with interest rates soaring and the value of the dollar plummeting, as foreign investors lose faith in its fundamental value.
“We’re running this $10 trillion gamble that interest rates aren’t going to rise,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard. “If they do, we could end up in a very difficult situation.”
…Meanwhile, foreign creditors behold the spectacle of California, stumbling to balance its books, and see a potential microcosm of American political weakness: no one wants to cut favored programs, and no one has the guts to raise taxes.
“Suddenly global investors look out and say ‘Wait a minute, are Americans really willing to tax themselves to pay us back?’ ” Mr. Rogoff said. “We’re at risk. The history of financial crises is that you’re rolling along, and then there’s a loss of confidence.”…
Harvard’s Kenneth Rogoff makes a very good point here. The history of crises is such that they may seem relatively benign and then, seemingly out of the blue, something causes investors and other market participants to lose confidence and run for the exits.
By the way, Professor Rogoff knows the history of financial crises. In fact, he co-authored one of the definitive papers on this topic with The University of Maryland’s Carmen Reinhart. The paper is called The Aftermath of Financial Crises and I have read it, although I have not posted on it. It is also worth reading.
Via: Real Clear Markets
- Economy , Geopolitics , Money , debt , income taxes , inflation
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