My latest article at The American Conservative. Some excerpts:
The hemming and hawing over the looming “fiscal cliff” is akin to passengers fighting over who gets to sit in the first class seats in a jumbo jet that just ran out of fuel. The U.S. government already sent the country over the cliff years ago; it’s just taken this long to (possibly) acknowledge reality. Legislators may strike a “compromise deal” that will postpone the crisis yet again, but soon enough it will return and with greater vengeance.
Another way of assessing our current, unsustainable trajectory is to look at the Congressional Budget Office (CBO) forecasts of the official Treasury debt/GDP ratio. As time passes, the unofficial indebtedness of Social Security and Medicare will show up as “official” debt when Uncle Sam has to enter the bond markets to cover the shortfall between beneficiary payments and incoming payroll taxes. When CBO plugged into its model the assumptions that the federal government would continue with its recent behavior in terms of maintaining tax rates, continually exempting large groups of Americans from the Alternative Minimum Tax, postponing reductions in reimbursement rates for doctors, and so on, then the federal debt held by the public exceeds 200% of GDP in the year 2038.
In all of this debate, there are those like Paul Krugman who claim the fears of a debt crisis are fantasies of right-wing idiots or liars….
[E]ven if Krugman were right and the falling dollar did give a boost to US exports and thus reduced unemployment, it’s not as if world investors would suddenly become bullish on dollars right when the economy recovered….
…Even if Krugman were right, and a moderate dose of (price) inflation is just what our economy needs right now to knock off two percentage points of unemployment, he still can’t control the fact that once that genie is out of the bottle, suddenly Americans will have to tolerate much higher price inflation just to avoid a new recession.
This insidious logic of how an inflationary spiral feeds on itself is what Hayek dubbed having “a tiger by the tail.” The U.S. government is insolvent—bankrupt—according to standard accounting principles. Rather than heeding the advice of Krugman and others to simply print our troubles away and/or raise taxes on “the rich,” the responsible thing to do is cut spending. This is the best solution to a government debt crisis, as the Canadian experience in the 1990s showed, and as mainstream surveys of numerous case studiesdocument.