From Athens near the Aegean to Washington on the Potomac, a curtain is descending on the days of prolonged deficit financing. Still, there are those who believe the show must go on.
Many of the executive branches of western governments have dawdled over rising debt and dithered on actually reducing it: trying to bring the federal debt back down to serviceable levels, rather than beginning the process of doing away with the substantial debts themselves. Politically, economically and morally, this has to stop.
Granted, some debt is obligatory, whether it be household, commercial or national. Temporary debt can prime the pump for innovation, investment and be the bridge between a good idea and its execution. But the level of debt incurred by many of the governments of developed countries is no longer driving them forward; it’s pulling them down.
Put on a scale, countries like Greece and Japan are at one end with federal debts that outweigh their GDP by roughly 125%, at the other extreme are Sweden and Finland: debtless with sizable monetary reserves. Sandwiched in the middle, with a 15-point spread spanning 60%-75%, are the likes of France, Britain, Portugal and the United States. This is not a pretty picture. The cost of just servicing the debts, never mind paying them back, considerably strains these countries’ growth prospects.
President Nixon once remarked, “We’re all Keynesians now” – perhaps why so many are feeling the crunch. Years of election promises and government programs paid for on borrowed money have made this a pan-Atlantic concern. The sprawling consequences of the sub-prime mortgage meltdown and Greek contagion serve as reminders that the financial houses of the west are more like row-houses than isolated mansions. The fire spreads quickly.
Most federal governments have been negligently slow in solving these problems. August 2nd saw President Obama sign into effect a deal that averted the debt-ceiling crisis for a year, but look back over the past two years and Mr. Obama did nothing to resolve it: he was little talk and less action. In the intervening time there was the Boehner Plan for debt reduction, the Reid Plan and the McConnell Plan, but no real Obama Plan.
President Obama ignored earlier bi-partisan proposals by the G6-Senators and mothballed his own debt commission’s recommendations in December of 2010. And the deal over the debt ceiling is far from a grand solution; instead it ups the ceiling by an immediate $900 billion and promises $917 billion in vague spending cuts over the next decade. It’s the can and not the debt that’s being kicked: all the way down the yellow-brick road into the 2012 presidential election. Anymore short-term solutions aimed at averting the crisis rather than solving it is not real debt reduction: it’s financial appeasement.
Canadians should be on their guard. While our federal debt is much lower, easier to service and better managed (with balanced budgets on the books for 2014), our households have cracked piggy banks. Canadian household debt is at an all time high of $1.5 trillion. Spread out amongst all Canadians, each person would have an outstanding debt of $41, 740, according to a report by the Certified General Accountants Association of Canada. This is the highest among 20 OECD countries in terms of a debt-to-financial assets ratio.
Deficit financing has increased quality of life at the cost of future living. The austerity budgets of Europe are a portent of potential consequences to come. Michel de Montaigne once remarked that, “If a hangover came before we got drunk we would see that we never drank to excess,” but excess in both debt and drink aren’t felt till the party’s over.
This is as much a moral failure as it is fiscal. A state is a partnership of neighbours, all living on the same street: past, present and future. The rule of law is not our sole binding; there is the moral law – love of thy neighbour. In any partnership of state we have no right, by anything that we do or neglect, to involve future neighbours in unnecessary penalties or deprive them of benefits that were in our power to extend. This principle is publicly admitted to in matters of deforestation, pollution and resource depletion. Let it be so of state finances and deficit spending.
There is no such thing as a free lunch: shame on those serving, shame on those gorging; for governments borrowing too heavily, for the electorate asking too few questions; for spending too much, for saving too little. Behind every convenience is a hard reality, and remembering first principles is a good first precaution: as Adam Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, from their regard to their own interest.” The government spending sprees of prior decades may have had political expediency but they have proved to not be in the public’s best interest.
There are some things borrowed money can’t buy, one of them being our way out of this problem.
TWS Hunt is a recent graduate of Trinity Western University and has spent time as a visiting student at the University of Oxford and has interned in the Office of the Prime Minister of Canada.