Thursday, June 18, 2009

Spending like there is no tomorrow

Business Times - 19 Jun 2009


Spending like there is no tomorrow

It seems in Washington's new financial universe, a trillion here and a trillion there are nothing more than small change

By LEON HADAR
WASHINGTON CORRESPONDENT

MANY years ago one of America's elder statesmen, the late Everett Dirksen, a Republican Senator from Illinois who had spoken often and passionately about the debt ceiling, federal waste and the growth of government, was reported to have made the following observation about US government spending: 'A billion here and a billion there, and pretty soon you're talking real money.'

It is not difficult to imagine Mr Dirksen turning over again and again in his grave these days after finding out that Washington has approved about US$13 trillion worth of bailouts over the last year; that the US deficit this year will run nearly US$2 trillion (as a result of financial bailouts and the stimulus package); and that the current national debt exceeds US$11 trillion.

Indeed, the Congressional Budget Office (CBO) has warned of a cumulative deficit of about US$8 trillion over the next decade. And in case you did not know it, in the American system one trillion is one thousand times one billion. Real money, indeed.

But it seems that in Washington's new financial universe, a trillion here and a trillion there are nothing more than small change. Hence, President Barak Obama and his aides are now proposing a plan to restructure the ailing American healthcare system that, according to the CBO, 'would result in a net increase in federal budget deficits of about US$1.0 trillion over the 2010-2019 period'.

And remember that these figures don't represent a complete cost estimate of the new healthcare system. That will have to be debated in Congress and it will need to include the huge subsidies that the government will have to pay for the coverage of the poor and the elderly, which means that the cost of the plan could actually come to about US$1.5 trillion over the 2010-2019 period.

Officials and lawmakers in Washington explain that the federal government had no other choice but to borrow and spend trillions of dollars to help the American economy avoid a rerun of the 1930s Great Depression, and there are some signs that such efforts are indeed creating the conditions for an economic recovery.

But the same officials and lawmakers are worried that expanding federal deficit and the mounting debt are going to have long-term catastrophic impact on the American economy.

Yet these concerns don't seem to have any major effect on the spending habits in Washington where the talk is about adding another trillion here - which company needs a government bailout today? - and another trillion there, with the costly plan to reform the healthcare system being the latest example.

The federal deficit remains the elephant in Oval Office. As the government is spending its way out of the recession, it could be creating inflationary pressures that end up putting upward pressure on interest rates and killing the economic recovery.

And while no one is seriously contemplating a scenario in which the United States goes bankrupt a la Iceland, a US government inflating its way out of debt endangers its credibility and reduces the confidence of the financial markets in the American economy.

The soaring US debt which puts downward pressure on the value of the US dollar has already ignited fears among foreign holders of US government bonds, led by China which is the largest creditor with more than US$700 billion invested in Treasury bonds.

Indeed, according to Republican Representative Mark Kirk who returned recently from a trip to China that included talks with government officials and central bank chief Zhou Xiaochuan, senior Chinese leaders have privately voiced fear over the soaring US budget deficit and said that they were increasingly looking to diversify from the US dollar.

'We heard across the board - in private - substantial, continuing and rising concern,' the Congressman told an audience at the Center for Strategic and International Studies, a Washington think tank. 'It's clear that China would like to diversify from its dollar investments,' he said.

In fairness to President Obama who has been accused by Republicans of being a 'socialist' who is responsible for the dramatic rise in government spending, most of these unrestrained fiscal policies go back to the presidency of George W Bush.

Mr Obama and his economic aides insist that one of the main ways to cut on runaway spending and avoid a fiscal disaster is by fixing the healthcare system.

'If we do not fix our healthcare system, America may go the way of GM (General Motors); paying more, getting less, and going broke,' Mr Obama said during an address before member of the American Medical Association in Chicago this week.

The expected costs of the healthcare reform plan have ignited opposition not only from Republican lawmakers but also from many Democrats on Capitol Hill who sense a rising public disenchantment with the level of uncontrolled government spending.

Responding to these public sentiments, Mr Obama has called on Congress to follow that budgetary restrictions that demand paying for expenditures with funds that are made available as the programme is in progress (so-called pay-as-you-go rules).

Moreover, Obama administration officials describe the proposed reform of the healthcare system as part of a wider overhaul of other large government programmes as well as the tax system that will help reduce the federal deficit to a manageable levels.

It is more likely, however, that any serious attempt to reduce the budget deficit would force the White House and Congress to make politically unpopular decisions, including raising taxes on the middle class and imposing cuts on government programmes that enjoy huge public support, like the national pension scheme (known in this country as Social Security).

And that is not going to happen any time soon.




Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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