Government shutdown isn't our biggest worry. It's the coming fiscal train wreck.

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.

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.

It’s tough to forecast the consequences of a fiscal train wreck; but if the Democrats win the day in a government shutdown, it only postpones the inevitable day of reckoning.

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.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the US International Trade Commission.

Previous

1 | 2