Bankrupt America

On Sunday (9/7/08) the New York Times carried a full two-page advertisement from the Peter G. Peterson Foundation, an appeal “to the presidential candidates at the American people” to take seriously “America’s $53 trillion hole,” which is the sum total of the country’s current liabilities and unfunded entitlement promises. This translates into $455,000 per U.S. household. The bulk of these unfunded liabilities ($41 trillion) are for Social Security and Medicare. But complicating these enormous debts and obligations, the ad points out, are “out of-control health care costs” an unprecedented trade deficit, and a personal savings rate that is near zero for the first time since the Great Depression. This grim fiscal picture threatens "severe economic hardship for our nation and its citizens, especially the young and future generations."

These were not end-of-times prophesies by some crackpot millionaire or eastern mystic, but a sober economic accounting by Peter Peterson--a former (Republican) Secretary of Commerce, a distinguished economist, and the chairman of the Peterson Institute for International Economics, a well-respected and mainstream economic think tank on Massachusetts Avenue in Washington, D.C. The appeal was also signed by three former U.S. Senators, two former U.S. Treasury Secretaries (George Shultz and Paul O’Neill) the former Chairman of the Federal Reserve (Paul Volcker) and the former Director of the Congressional Budget Office (Alice Rivlin).

Peterson himself first called attention to the multiple dimensions of U.S. debt and deficits in his 2004 book Running on Empty, which was central to the casting of my own book on the even broader dimensions of U.S. decline, The End of the American Century (appearing next month). In that book, I see the U.S. fading as an economic and political superpower, as a model for other countries, and as the preeminent factor in global politics. The core of this decline is economic and social: the multiple levels and dimensions of U.S. debt; the declining standard of living for most Americans; and the growing levels of poverty and inequality. The U.S. government and American citizens have been living beyond their means for at least two decades, and depending on borrowed money (much of it from abroad) to sustain this binge. This can not continue forever, of course, and the rubber is finally hitting the road.

The United States has had periods of debt and economic decline in the past, of course, and has always managed to pull back into economic growth and solvency. What is different this time is the convergence of so many dimensions of debt, deficit, and decline, all at the same time. The U.S. federal debt, at some $10 trillion, has grown from about a third of GDP in the 1970s to over two-thirds now. Next year’s budget deficit will add almost $500 billion to that debt. The U.S. trade deficit has reached new records in recent years, even as a percentage of GDP. Government profligacy is matched by consumers: the household savings rate in the U.S. has been declining for two decades, is the lowest among all developed countries, and in 2005 fell below zero for the first time ever. Credit card and mortgage debt are both near record levels, as are bankruptcies and mortgage foreclosures. The whole financial system is under stress, and not only because of Fannie Mae and Freddie Mac. Meanwhile, the value of the dollar is at a record low against the euro, and the price of oil is a record high.

It is difficult to see how the country can reverse all these trends. As Peterson points out in his New York Times appeal, to “grow out” of this crisis “would require real economic growth in double digits for the next several decades.” Even in the best of times, the U.S. economy grows only about 3% a year. Sustained double digit growth is impossible, especially given the new environment of high energy prices, competition from China, India, and others, and the declining willingness of other countries to let the U.S. set global rules. The United States is in for tough times.

Our leaders, and the mass media, need to address and confront these issues. This will be a difficult task for whomever is elected President, because it will require belt-tightening and reduced expectations from all of us. Both Obama and McCain are promising recovery and prosperity. The reality is likely to be quite different. The new president will have to make many tough decisions. It will require wisdom and patience from both leaders and citizens to navigate these difficult shoals.