Taking Someone Else's Money
With French voters electing a Socialist presidential candidate who campaigned on an anti-austerity platform, the size of government has truly evolved into a global, and not just American, vote-moving issue. However, we should call “austerity” policies by their true name—fiscal responsibility. Many economists agree that when a country’s debt reaches 90 percent of GDP, serious economic contraction occurs that can persist for decades. This 90 percent is often called the danger zone. Greece, the paradigm for fiscal conservatives around the world, had debt to GDP ratio of 165.4 percent in 2011.
The word austerity conjures up images of Ebenezer Scrooge, but that metaphor is hardly accurate. It is highly reasonable for a creditor—in Greece’s case Germany and parts of the EU—to ask for a show of faith in proportion to the riskiness of the loan. A responsible bank lending to a subprime candidate usually asks for more collateral than normal or a cosigner if applicable. Asking Greece to adopt fiscally responsible cuts to bloated, unfunded liabilities is no different. Of course, the severity of the Greek (and potentially Spanish, French and Italian) situation creates a greater need for fiscal responsibility but also steadfastness on the part of creditors.
The moral hazard associated with bailouts is massive and asking for spending cuts is a way for Germany to mitigate this hazard. When the recipients of government largess balk at responsible cuts—as they’ve been done in Greece, England and now France—Germany has to quit bailing them out. The problem with European Socialism is that eventually you run out of Germany’s money.
Fiscally responsible spending cuts in the U.S. must come soon or we are heading into the danger zone and will rocket past Greek territory. Based on CBO’s alternative fiscal scenario projections, current U.S. debt to GDP is 72.7 percent; however, if you include all unfunded liabilities then we are almost in peril. The same report predicted U.S. debt to GDP will reach 94.2 percent in 10 years. CBO Director Doug Elmendorf testified that further extrapolating these projections pushes the debt to GDP ratio as high as 190 percent by 2035.
Fixing this problem—as House Budget Chairman Paul Ryan is trying to do—requires fiscal responsibility that includes spending cuts and serious entitlement reform. Nobody can bail us out of our future fiscal hole, and if they could, they’d demand fiscally responsible “austerity” measures as a show of good faith.