In Washington: Will America cut up its credit card?
Sunday 04 July 1999
Now Rosie is back, standing at the shoulder of President Bill Clinton. She has been brought out in a good cause, which is paying off by 2015 the portion of the US national debt held by the public.
This might seem a quixotic, if ascetically Protestant, aim. After all, the US has only been without a national debt for one year since 1776. And retiring the national debt was one of the brilliant innovations of Nicolae Ceausescu, the Romanian despot, who turned his country into one of the poorest in Europe by putting debt repayment above all other priorities.
But, needless to say, the goal of the President last week in announcing that he would cut up the nation's credit card owed more to politics than to any Thatcheresque desire to balance the nation's books. An election is on its way. Expect to hear much in the next year about the magical prospects for the US economy, and don't expect to believe more than about half of it.
The President wants to save social security, the term America applies to its pension system. Like many countries, America fears that the whole system will implode as the baby boom generation retires and the money runs out.
There is more money around for that goal, because the US economy has performed well enough - and budgetary discipline has been rigorous enough - to turn the massive annual US federal deficit into a huge and growing surplus. In addition, Mr Clinton wants partly to privatise the system, by creating new USA savings accounts, and spend more on education and defence.
Republicans want to do something else with the surplus: they want to offer voters a massive tax cut. If the budget is producing a surplus, they reason quite logically, that means people are paying in more than they are getting out, and it's time to hand some back.
It looked for a while as if these competing agendas would prevent anything from happening. But magically, last weekend the White House found some more money. A lot more money: a thousand billion dollars, in fact, which had fallen down the back of the sofa.
"That is an amazing thing," said the President.
Isn't it just. The Office of Management and the Budget ran the numbers for the economy through its computers again in light of better-than-expected economic performance, and it found that the surpluses for the next 15 years would be $5,940bn (pounds 3,760bn), rather than the trivial sum expected back in February.
The economic projections are always the first thing to look at when Rosie Scenario has been around, rather as one might count the spoons after a light-fingered relative has visited. The White House predicts average economic growth of 2.3 per cent a year for 15 years, a little below average US growth if anything. It assumes no recession for the next 15 years, but no economic growth of more than 2.6 per cent, either. Inflation is expected to stay at around 2.5 per cent, giving nominal growth of about 5 per cent a year, a realistic target. Interest rates are predicted to remain at around 5.5 per cent for 10-year Treasury notes, yielding a real interest rate of 3 per cent - again, not unreasonable.
But look at the numbers a little more closely. The latest thousand billion dollars relies on a revised projection of productivity, assuming that the economic boom of the last few years really has represented a quantum leap - the new economic paradigm thesis.
Similarly, unemployment is assumed to remain between 4.5 and 5.2 per cent from now until 2004. Recent economic research suggests that the unemployment rate associated with stable inflation is about 5.5 per cent. Can the US really sustain this performance for another five years without greater inflation?
The figures involved are tiny changes; but bear in mind that a difference of 0.1 per cent in growth means a difference of more than $200bn in the accumulated surplus for the next decade.
But the most optimistic assumption of all - and this is where the lovely Rosie comes in - is that politicians happily sit on their hands while the surplus rises, content to campaign on the fact that the surplus is getting happily fatter every year. If the Republicans stay in power in Congress, a tax cut will get ever more attractive. If the Democrats win control then spending increases will be just as tasty.
The signs are not auspicious. The budget spending limits look likely to get rewritten this year. In February, the White House estimated that next year's defence spending would be $275bn; now it reckons that this will be more than $280bn. As the old saying goes, a billion here, a billion there and pretty soon you're talking real money.
The point of the crystal-ball gazing, and the vast surpluses called up from the deep, is entirely political.
They enable everyone to get a bit of what they want this year - tax cuts, social security, extra spending. Without that extra billion, there would have been an unsavoury fight over the President's plans, and there may still be - but no one can blame it on Mr Clinton. He has delivered the goods.
Of course, it is perfectly reasonable to say: "Why should the US bother paying back its debt? There are plenty of more laudable things to do with the money."
But the US economic performance of the last few years has crucially depended on the ability of the federal government to stop spending more than it has received. It has helped keep interest rates down and it has balanced out American consumers' growing propensity to spend beyond their means that has powered the consumption boom.
In the scramble to score political points as the US presidential campaign cranks up, it may be that many of these hard-earned achievements go out the window.
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