Government shutdown isn't our biggest worry. It's the coming fiscal train wreck.
Closing US federal offices for a few days will have not a lasting impact. What counts is whether the newly elected conservative majority in the House of Representatives keeps its promise to cut the deficit and reign in dangerous levels of government spending.
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As for Social Security – hush, Republicans have a secret plan! The GOP will save money but so far has not revealed how. Private investment accounts, the favorite among free marketeers, would leave brokers smiling but the old poorer, judging by how most IRAs have faired since 2000.Skip to next paragraph
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Of course, if the president comes out of the government shutdown politically stronger, then its business as usual. But can it be?
Can't go back to business as usual
Thanks to huge deficits, inflation expectations are rising, and bond investors are becoming wary that the secular trend on 20- and 30-year US Treasury rates is up and up. That’s not just a cyclical adjustment this summer, as unemployment falls and the Federal Reserve ends quantitative easing. Rather, the upward trend is happening in large part because federal deficits in coming years are expected to be much larger than what President Obama's budgets project. He assumes too much cost savings and additional revenue from health-care reforms, and a 4 percent growth rate for the next four years, which few economists would endorse.
As the long rate on Treasuries rises, interest payments will absorb more and more federal revenue, and austerity will be foisted on the US government in the manner of Greece or Portugal. At that point, slashing as opposed to reason will prevail. Thoughtful reforms in health care and for Social Security become even more difficult.
The choices are clear. Congress must make responsible reforms to health care that harness drug, administrative, and tort costs now, and ensure solvency for Social Security by raising the retirement age to 70, or the bond vigilantes will ultimately end the party. Then more draconian changes will be forced on the American people who simply refuse to live within their means.