In Washington: Will America cut up its credit card?

t is time to welcome back one of the best-loved characters from 1980s America, a lovely if unreliable person called Rosie Scenario. Rosie helped the Reagan administration avoid facing up to the consequences of its policies: she could always be hauled onstage to prove that, however bad the budget numbers looked, happiness was just around the corner because the economy was headed for such wonderful times.

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.

Suggested Topics
News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
News
news
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
New Articles
i100... with this review
PROMOTED VIDEO
Voices
Holly's review of Peterborough's Pizza Express quickly went viral on social media
Sport
footballTim Sherwood: This might be th match to wake up Manchester City
Arts and Entertainment
musicHow female vocalists are now writing their own hits
New Articles
i100
News
ebooksAn unforgettable anthology of contemporary reportage
News
news
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
News
Blahnik says: 'I think I understand the English more than they do themselves'
people
Arts and Entertainment
Michelle Dockery as Lady Mary Crawley in Downton Abbey
TVInside Downton Abbey series 5
Life and Style
The term 'normcore' was given the oxygen of publicity by New York magazine during the autumn/winter shows in Paris in February
fashionWhen is a trend a non-trend? When it's Normcore, since you ask
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam