Now that the "fiscal cliff" and "sequester" have come and gone, the tragicomedy of Washington's inability to control its spending continues unabated, with other deadlines looming.
On March 27, the American government will run out of funding for its discretionary operations, unless Congress votes to extend this deadline to September. Congress also has until mid-May to raise the debt ceiling once again.
A new book by Canadian economist Pierre Lemieux, The Public Debt Problem, sheds light on how the U.S. went bankrupt. Lemieux argues that steady increases in the growth of the American welfare state is the primary culprit.
Contrary to what most people think, the U.S. is not that different from Canada and Europe any more. If we include all welfare state functions, from income security to spending on education, health care and other social programs, these functions account for 66% of all government expenditures.
The rise in defence spending under presidents Ronald Reagan and George Bush II is often blamed for Washington's deficits. But defence only comprises about 20% of the federal budget, compared to the 22% devoted to old-age pensions.
Given that the U.S. spends as much on the military as all other countries combined, I'm certainly not opposed to important cuts in this sector. But those who think downsizing the American empire would solve the public finances crisis have not looked at the numbers. Even if the entire armed forces were suddenly disbanded, that would still leave Washington with a large deficit this year.
What's to be done?
As Lemieux notes, anybody on a mission to cut more than a marginal chunk of federal expenditures is facing tough enemies. All the interest groups favoured by government spending will fight tirelessly to keep their privileges and entitlements.
If spending is not cut, there are only two other ways to deal with an unsustainable debt. The first is repudiation, or open default. Holders of government bonds would lose, but taxpayers would gain. The second is stealth default through inflation brought about by the Fed. Everyone would lose if the prices of all goods and services went up, except the government, which would be able to repay its debt in cheapened money.
There is always a third alternative: doing nothing and waiting for the problem to go away — or to blow up in your face. It seems to be the one favoured by politicians in Washington.
Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.
* This column appears in Sun Media newspapers, published both in several of Canada's key urban markets (Toronto, Ottawa, Calgary, Edmonton, Winnipeg and London) and in its 28 community dailies.