The US Government Makes A Commitment It Can’t Keep

Shortly after S&P put the sovereign debt of the United Kingdom on credit watch, downgrading its outlook from “stable” to “negative”, Treasury Secretary Geithner said the Administration was committed to keeping America from facing a similar problem.  “It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner told Bloomberg. He added that government’s goal was to bring national debt as a percentage of GDP to 3% from a number that will be close to 13% this year. In a country with a GDP of over $14 trillion, hoping for that level of change is preposterous.

Geithner must not have read the minutes from the Federal Open Market Committee meeting in April. The consensus at the gathering was that it will take several years for the economy to recover and that unemployment will remain at extraordinarily high levels through 2011. It is remarkable that anyone could believe that such weak forecast would trigger a steep enough drop in national debt to bring it down to such a small ratio in relationship to GDP.

Geithner’s comments dodged the critical issue of US government receipts. Tax collections are already running well under the estimates in the budget and this has caused an upward revision in the forecast for the deficit in the current fiscal year. There is nothing in the employment or business activity indicators that would support the concept that either individual or business taxpayers are going to become a better source of government income in the quarters ahead.

Conservatives have been concerned that the philosophy of the Administration bends in the direction of socialism and that the state is taking on too much of the burden that should be carried by private enterprise. Whether this is true or not is academic. The government is spending too much money. Receipts are not going to improve in the next year and perhaps for another two years. Ratings agencies such as  S&P are going to become more concerned by the size of the deficit and that it has little if any prospect of shrinking before the end of this decade. The negative implications for the US debt rating are clear. America cannot keep its AAA status because government revenue will not rise. The only leverage in the budget is on the spending side.

For reasons that are hard to fathom, the federal government is being run as if the appetite for Treasuries is inexhaustible. Large holders of Treasuries, especially China, have made it imminently clear that the assumption is untrue.  The current troubled period should not be managed from Never Never Land. The expenditures in the budget have to be cut, even if every program contained in it has to be reexamined and revised.

The budget put together for this year, like almost every budget in the past, is sold to Congress and the public on the basis that each and every expenditure in it is more precious than the next. One brick cannot be removed from the wall else it may fall entirely. No sane private enterprise budget in the business world is configured that way. The government’s plans are not magically different in the way that they work when compared to the private sector.

S&P has done the government a favor. It has put up the storm flags while the trouble at sea is still a long way off. It would be foolish to keep national spending at the level that is planned now, particularly when the consequences are so clear.