The Case of the Intractable Deficit

Since childhood, I have treasured my friendship with Sherlock Holmes and Dr. Watson. Together we have solved mysteries such as “The Red-Headed League” and “The Hound of the Baskervilles.”

I recently worked on another case with my old friends from Baker Street that we named “Can America Escape the Poor House?” Holmes needed to use every skill in his arsenal to find a cure for America’s spending binge. He noted that we went from being the world’s biggest creditor to the world’s biggest debtor in one generation. To spend trillions requires a lot of wine, women, and song.

In between cases, over the years Sherlock, Watson and I have enjoyed sitting in wicker chairs and leisurely reading our newspapers. Eloise, my beloved wife of 40 years, has reluctantly accepted our routines. But she recently interrupted my dawdling over the sports pages. In dulcet tones, she recommended that I read an article in the New York Times, “The Dismal Math of Sovereign Debt.”

The thrust of the article was that a country generally descends toward insolvency if its debt exceeds 100 percent of its Gross National Product. The indebted country must return to surplus budgets or enjoy a growth rate above its borrowing costs to avoid the poor house.

The annual tab to fund our expected $20 trillion deficit in 2020 is scary. If our interest costs rise to 10 percent, the annual carrying costs on our national debt will be $2 trillion. This could be close to 40 percent of our expected $5 trillion in revenues in 2020.

Growing our way out of debt seems unlikely. America is a trotter, not a race horse — for more than 50 years, the U.S. GNP grew at only 3 percent. Borrowing money from overseas stifles our growth prospects because we are transferring real assets abroad.

What are America’s long-term prospects? We are going down a slippery slope. Over the next two years, America will have a public debt load that exceeds 100 percent of our GNP — the tipping point for going over the cliff. Kenneth Rogoff and Carmen Reinhart argued persuasively in their book “This Time is Different” that our debt load poses several challenges:

Bor rowing trillions, year in and year out, is fraught with more danger than racing in the Indianapolis 500. At any time you can be red-flagged at the ATM machine!

Funding our humongous debts will emasculate almost every other government spending initiative.

Reducing the federal deficit to a sustainable 3 percent of GNP will require raising revenues by $500 billion. According to a January 2010 study by the non-partisan Tax Policy Center, the government would have to substantially increase taxes for families with more than $209,000 in taxable income and raise top rates from the current 35 percent to 76.8 percent.

We can also slash expenditures by $500 billion, but that runs against the inside-the-Beltway culture.

Holmes, Watson and I discussed whether China could help us over our sticky patch. Watson argued that China needs us because its high growth rate and employment rate require selling goods to America even on an IOU basis. But Holmes dispassionately knocked down Watson’s arguments, pointing out that China wants to replace America as the world’s greatest super power. Chinese officials know that without their money, we will run out of gas and need to use rickshaws.

The last time I visited Holmes at Baker Street, he confided that Uncle Sam has recklessly squandered his legacy on a hodgepodge of programs.

Inspector Lestrade of Scotland Yard, a longtime friend of Holmes’, had the final word. Lestrade said that the bank robber Willie Sutton had left our sinking ship. In search of richer victims, Sutton recently immigrated to China!