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The Road to Fiscal Crisis

WASHINGTON, DC – It has become fashionable among Washington insiders – Democrats and Republicans alike – to throw up their hands and say: We ultimately face a major budget crisis in the United States, particularly as rising health-care costs increase the fiscal burden of entitlements like Medicare and Medicaid. But then the same people typically smile and point out that investors from other parts of the world still want to lend the US vast amounts of money, keeping long-term interest rates low and allowing the country to run big deficits for the foreseeable future.

This view is seriously flawed. It implies that the US can kick the can down the road as long as the dollar remains the world’s preeminent reserve currency, and America offers the best safe haven for skittish capital owners. By 2015, according to this logic, politicians will have done nothing to raise taxes and very little to cut expenditure, so the US will still have a budget deficit of around $1 trillion, and will finance a substantial portion of it by selling government bonds to foreigners. By 2050, there will undoubtedly be a fiscal problem – but, again, there is plenty of time to ignore it.