We Are Out of Money

American governance won't begin to inch forward until the political class faces basic facts.


American conservatives, particularly the fiscal variety, tend to hold up the European Union as a model of irresponsible, big-spending economic policy. But consider this: According to E.U. rules, member countries cannot maintain budget deficits above 3 percent of gross domestic product; nor can their total debt rise above 60 percent of GDP. As Veronique de Rugy points out in this issue, the U.S. budget deficit in 2009 was three times the E.U.'s limit, and total debt will zoom past the 60 percent threshold sometime this year. Washington makes Paris look frugal.

In March the federal government created the most expensive new entitlement in four decades, even as the bond rating company Moody's Investors Service warned that debt levels could soon precipitate a downgrade in U.S. Treasury bonds. The main opposition party fought the bill by decrying "cuts" to Medicare, and it has kept itself at arm's length from one of the few politicians talking seriously about long-term reform.

Today may be terrible, but tomorrow is going to be much worse, at least as measured by such metrics as deficits, debt, and entitlement spending. In an April speech, Federal Reserve Chairman Ben Bernanke laid out the misery that awaits us. "The arithmetic is, unfortunately, quite clear," he said. "To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above."

Yet in the very next paragraph, Bernanke displayed the kind of cowardice that got us into and has helped extend our awful economic mess: "Today the economy continues to operate well below its potential, which implies that a sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable. However, nothing prevents us from beginning now to develop a credible plan for meeting our long-run fiscal challenges."

States, counties, and municipalities, lacking Bernanke's ability to print money, do not have the luxury of "beginning now to develop a credible plan" for the future. They are flat out of money in the present. But they too refuse to face reality.

The housing bubble, with its tax-generating wealth, was already bursting in 2007. Yet as recently as 2009, Montgomery County, Maryland, decided to make "phantom" cost-of-living increases to the pensions of government workers, linking contributions to salary increases that did not occur. This sweetheart deal, which added more than $7 million to the county's annual budget (according to The Washington Post), tasted rather bitter at a time when the county's revenue was falling short of projections by more than $24 million. Yet after one Montgomery County Council member proposed eliminating this sop to the public-sector unions, four of his colleagues joined a rally on the rooftop of the council's parking garage, leading a crowd of 400 government employees in chants of "We've had enough!" and "No justice, no peace."

In Los Angeles, former labor organizer and once-rising political star Antonio Villaraigosa, now a second-term mayor who has fallen so far that the local glossy city magazine made him a cover boy last year under the headline "Failure," announced in April his intention to shut down "inessential" city services two days a week, after the city controller had declared that the municipality would "run out of money" by June 30. Villaraigosa's deputy chief of staff, Matt Szabo, told The Wall Street Journal the city's public-sector unions "have priced themselves out of a job."

Yet those unions received significant raises from the tough-sounding mayor as recently as 2007. The city's labor force grew by more than 9 percent from 2000 to 2009, and annual pension contributions tripled, according to the Los Angeles Times. In a March interview with National Public Radio, Villaraigosa lamented that "California cities are constrained by various propositions which limit your ability to raise revenues" (though he managed to raise the city's sales tax from 8.25 percent to 9.75 percent) and portrayed renegotiating union contracts as an unlikely last resort. "There aren't a lot of options here," he said. "We have contracts with our employees that we have to abide by. So unless they agree to sharing in the sacrifice in these tough times, I won't have a lot of options."

Even bankruptcy isn't necessarily a harsh enough reality check. The city of Vallejo, California, went bankrupt in 2008, largely due to impossible-to-meet pension obligations. Although the bankruptcy judge declared that pension contracts were fair game in the reorganization process, the city last December cut just about everything except pension contributions for government employees, according to a Wall Street Journal piece by Steven Greenhut. In March of this year, Vallejo agreed to a new contract with firefighters that again left pensions unchanged. "The majority [of council members] did not have the political will to touch the pink elephant in the room—public safety influence, benefits, and pay," Vice Mayor Stephanie Gomes told Greenhut.

California, it cannot be stressed enough, isn't necessarily worse than anywhere else; it's just bigger (and louder). A Reason Foundation study of state spending increases during the comparatively good times of 2002 to 2007 found the Golden State to be in the middle of the pack on a percentage basis. And even after two-plus years of crisis, with unrelenting headlines about "annihilating" cuts, state bureaucracies remain bloated.

Surveying the fiscal wreckage at the end of 2009, BusinessWeek's Joe Mysak found that the 50 states had cut their combined payrolls that year by a minuscule 0.25 percent. Mysak's conclusion: "Politicians everywhere are talking about layoffs, of course. They have been talking about eliminating jobs, often in threatening tones, since at least January. As the numbers show, for most, it's just talk."

Such talk has created a feedback loop in the media, where budget cut horror stories—which never mention how much state and local government spending skyrocketed in the years before the recession—mix seamlessly with editorial-page calls to spend still more money we don't have on government jobs we can't afford. "Upcoming budget cuts by recession-battered states will lead to more job losses," The New York Times editorialized in April. "As states cut spending, there is less business for private-sector contractors and more layoffs of government employees." Meanwhile, the Times argued, the federal government needs to be spending more "on infrastructure and clean energy" and the creation of "public jobs, especially summer youth jobs."

When we're still talking about government make-work, it's a sure sign we haven't recognized the sinkhole we're in. A smattering of summer jobs for teenagers is no consolation for jacking up the cost of borrowing for everyone during an economic downturn. Yet that's what the White House's best economic minds are proposing. "Failure to take additional targeted actions to jump-start job creation," Christina Romer, chairwoman of the Council of Economic Advisers, said in March, "would lead to slower recovery and higher unemployment for an extended period."

With policy philosophy like that, it's no wonder that governors, facing nearly $200 billion in budget deficits, are descending upon Washington for another round of stimulus funding. As long as there's still one greater fool left willing to chase diminishing returns with more cash, politicians can keep putting off the day of reckoning. If they're lucky, they'll be long out of office when the gong strikes midnight. Unfortunately for most of us, we'll still be here. 

Matt Welch (matt.welch@reason.com) is editor in chief of reason.