Austerity

Most Americans think there’s a problem, but it might be surprising how seriously voters are taking the national debt. An AP/CNBC poll in late November found that 85 percent of Americans think the federal debt will hurt their children and grandchildren. For those of you playing at home, we are those children and grandchildren.

The same survey also shows that Americans aren’t quite sure what to do in response but that they are open to some compromise. It indicated that 59 percent of Americans support cutting spending rather than raising taxes, with 30 percent believing the opposite. But as a general question, a strong majority of Americans think the solution will involve a mix of cuts and tax hikes. In other words, people on both sides have their eyes wide open. And to the extent that we can’t agree on solutions yet, neither could the National Commission on Fiscal Responsibility and Reform.

To be clear, the federal government shouldn’t implement the full slate of austerity cuts right now. But within two years, one hopes that the economy will have recovered. At that point, we must begin the changes. Delay is not an option: The federal debt will now reach 90 percent of gross domestic product in 2020, according to the nonpartisan Congressional Budget Office, up from 40 percent in 2008. For reference, Greece’s debt has hit 144 percent and the most recently troubled country, Ireland, stands at 98.6 percent.

The United States has certainly held higher debt as a percentage of GDP — 115 percent after World War II — but we shouldn’t bet on being able to sustain such levels long-term. Above the 90 percent threshold, according to economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, median economic growth tends to fall by an average of 1 percent. Below that threshold, there is no clear correlation.

But a decline in growth would be the least of our worries. We are in the neighborhood where social unrest and sharply decreased confidence in the reliability of our bonds are a possibility, a la grecque. Worse still, exactly who is supposed to bail out the most powerful nation in the world?

In the meantime, Americans aren’t clamoring for the massive increases in deficit spending sought by liberals. They know that the 2009 stimulus has not produced a meaningful recovery: Unemployment remains stuck at nearly 10 percent, and GDP appears to have grown only 2.5 percent in the third quarter of 2010, shy of the widely held 3 percent target for meaningful job creation. They may also know that President Barack Obama has belatedly admitted that there are “no such thing as shovel-ready projects.” Although we can’t know what would have happened without the stimulus, it hasn’t delivered the results that the administration predicted, so it seems unwise to double down.

If you’ll indulge some statistics, John Cogan, John Taylor, Volker Wieland and Tobias Cwik found that the stimulus has contributed to only 0.2 percent of GDP growth so far. One likely cause is that federal deficits tend to raise the cost of borrowing for private businesses. On the other hand, former Obama advisor Christina Romer, with colleague and husband David Romer, conclude that a dollar in tax cuts has a Keynesian multiplier of 3. Economics is not an exact science, but it seems that tax cuts, or at least avoiding new regulations and taxes on health care, would have served us better.

When the economy recovers and the austerity measures begin, the pain will be felt everywhere. It will impact discretionary spending, on highways and national parks and all the rest. It will be felt in defense and foreign affairs spending, when policymakers have to whip out calculators as they weigh policy. Most of all, it will have to be felt in the third of the federal budget currently consumed by Social Security and Medicare.

That last fact will hit our generation particularly hard. No one seriously proposes taking away benefits from people who are close to retirement and have little time to adapt to benefits changes. But everyone expects our generation to pay more into entitlement programs than we’ll get out of them. Even if we do nothing, Social Security is projected to begin paying out more than it collects before we reach retirement. Our generation, like it or not, will have to get the house in order.

We know there’s a problem. Fortunately, we still have time to fix it. We also have some examples to study, especially Prime Minister David Cameron’s austerity plan in the United Kingdom, which despite some flaws seems to be shoring up Britain’s debt rating. As the generation with the most to lose, we should be relieved that there is still time, political awareness and a new House majority that shares our worries and, hopefully, our will.

Brian Lipshutz is a politics major from Lafayette Hill, Pa. He can be reached at lipshutz@princeton.edu.