Voters are right to think our addiction to federal deficit spending is killing our economy. A thorough new study from Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University takes a look at the relationships among rising debt, inflation and economic growth for 44 developed and developing countries. The findings bode poorly for a spending-crazy Washington.
From 1946 through 2009, growth of developed countries (including the United States) stood at an annual rate of just shy of 4 percent when debt was no greater than 30 percent of gross domestic product. The picture gets bleaker for those countries holding debt above 30 but below 90 percent — economic growth slowed down but still hovered around 3 percent to 3.5 percent per year. When debt rose to over 90 percent of GDP, average growth went negative. Reinhart and Rogoff found that when this worst-case scenario occurs in the U.S., economic growth rates go negative and the inflation rate goes to above 5.5 percent. According to the Heritage Foundation’s Bill Beach, the International Monetary Fund and the Congressional Budget Office both predict U.S. sovereign debt is fast approaching 100 percent of GDP.
There’s never been a better time for President Obama to put an end to the idea that he may be the next President Carter. He can head off inflation by taming federal spending and working with Congress to cut programs. And once that’s done, he can cut taxes to stimulate the economy. Sadly, he won’t. Obama sent a letter last week to leaders of the G-20, airing concerns over the decision of European leaders to start imposing austerity measures: “We should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong.”
Unity of purpose is the problem. For Greece and Spain to face financial disaster, politicians first had to give monopolistic unions lavish pensions and a hearty social welfare state. Austerity measures were the hard-bought, politically unpopular solution, so much so that protests against the measures turned to riots.
Congress passed rules earlier this year to prevent itself from spending money it doesn’t have. But the same majority Democrats who voted for Pay-Go simply override those rules whenever they have to pass an actual spending bill. And on Saturday, Obama ripped opponents of his second stimulus, saying that they are endangering the jobs and unemployment benefits of millions of Americans. It’s time to face reality and start cutting spending.