Wednesday, October 2, 2013

The National Security Threat of Big Debt


Austin Bay

The National Security Threat of Big Debt
Oct. 02, 2013

According to usdebtclock.org's on-line national debt counter, as I begin to write this column the burden of the past is $16,959,384,107,300.

Or it was, for a split second. Count to ten and the debt immoderately climbs another $100,000. Though the numbers are approximate, past promises made by Washington, and current spending directed by Washington will breach the current debt ceiling of $17 trillion in a few short weeks.

America's debt burden has been a looming national security threat for decades, though one that defied headline writers. Because it doesn't drop bombs, Big Debt could not be framed as an immediate crisis. Its danger is long-term. Moreover, the enemy driving Big Debt is problematic. To paraphrase Walt Kelly's Pogo cartoon character, the enemy -- he is us.

National leaders have made the connection between economic strength and a robust defense. Dwight Eisenhower did. His NSC-162/1 stated that defeating the Soviet Union required the "maintenance of a sound, strong and growing economy" that would underpin U.S. power for "the long pull" of the Cold War.

In the 21st century, Big Debt may be the enemy. In August 2010, former Chairman of the Joint Chiefs of Staff Admiral Mike Mullen told CNN that "... the most significant threat to our national security is our debt." Because the ability to arm, man and train a first-rate defense force is "directly related to the health of our economy over time."

Greece's financial crisis, bred by unsustainable debt, demonstrates how quickly economic decline shreds military forces. Moored Greek submarines, grounded jet aircraft and military pay cuts of 37 percent have not balanced budgets in Athens.

Economic decline, accelerated by past promises, also shreds social safety nets and shatters cities. California towns like Vallejo know it. When Vallejo went bankrupt five years ago, city leaders declined political battle with the enormously powerful state public employees retirement system, Calpers, and agreed to treat pension debt as different from other municipal debts.

This week Vallejo announced that pension payments have disrupted its restructured budget, despite cuts in city services. According to Reuters, pension costs for Vallejo cities will rise from 33 to 42 percent in the next five years. Pensions are financial promises based on work performed. California politicians, however, used generous pension increases as a means for securing the political support of public employee unions. These "sweeteners" have turned to fiscal poison. Vallejo has encountered the long term and it is a constant crisis.

What can be done? If Vallejo doesn't seek legal relief from pension debt, other debt-ridden towns will.

In January the Congressional Research Service (CRS) issued a paper entitled "Sovereign Debt in Advanced Economies." The study notes that the debt of sovereign countries that can issue currency differs from private debt or Vallejo's municipal debt. There are no international bankruptcy courts "to provide creditors recourse against governments that refuse to pay their debts." The ability to issue currency means a sovereign government can print more money. This risk is inflation, which reduces the "real" value of the debt but also devalues everything else.

The CRS paper outlined five policy options for addressing debt. (1) Fiscal Consolidation: raise taxes, cut spending. (2) Debt Restructuring: lower and extended payments (Greece). (3) Inflation. (4) Growth: economic policies to spur growth. (5) Financial Repression: force citizens to buy government bonds.

The most interesting discussion addressed Growth. The CRS agreed that growth can be "stimulated" by "expansionary" spending, but that adds more debt. Another option offered debt reduction, albeit long-term: "pursuing structural reforms at the microeconomic level." These include spurring competition in industries and liberalizing trade. It should have added reducing tax complexity and regulatory burdens on small businesses. Growth at the grass roots by encouraging entrepreneurs -- that is the way to attack national debt.

Ah yes -- the debt clock. $16,959, 523,401,634. I think. The last four digits flashed by as I blinked.

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