Douglas J. Besharow and Douglas M. Call write in The Wilson Quarterly:
Years ago, budget watchers warned that the so-called wealthy countries of the developed world had erected unsustainable social welfare systems. The predicted crisis, however, was decades in the future, so neither politicians nor voters were prepared to make tough choices. Then came the recent recession. Sharply reduced tax revenues combined with massive stimulus spending raised budget deficits in developed countries to levels unprecedented in peacetime and added vastly more debt on top of the existing long-term social welfare debt. In the United States, the federal deficit jumped from about 1.2 percent of GDP to about 9.9 percent between 2007 and 2009, reaching $1.4 trillion. According to The Washington Post, the federal government will “borrow 41 cents of every dollar it spends” this year.
For a while, it seemed that the developed countries might be able to borrow their way out of immediate trouble. But with Greece’s brush with insolvency this past year, and fears that Spain, Italy, and Portugal would soon face similar problems, the day of reckoning suddenly, very suddenly, seemed at hand.
Many European countries responded by adopting multibillion-dollar austerity packages including elements such as higher taxes, cuts or freezes in government spending, salary freezes for government employees, and, most important, rollbacks in social welfare benefits. Some of the packages were modest, but many involved major tightening, notably in Britain, where the new Tory–Liberal Democratic coalition government is cutting most government departments by 25 percent over five years (though health care, notably, is largely exempt) and raising taxes.
As politically controversial as they have been, these austerity measures aren’t anywhere close to correcting the immense long-term imbalances these countries face. And, of course, the United States has yet to start the process of retrenchment because the Obama administration, with the support of many economists, has decided that the economy should recover first—a strategy that is easier to pursue because America’s bond rating is not yet under pressure.
Nevertheless, the immediacy of today’s budget problems—and the looming threat of a failed debt refinancing—makes the conditions for long-term reform in the United States ripe. Most international finance economists agree that the bond market will eventually insist on a solution and that the sooner the needed corrections are made, the less jarring they will be. They also agree the fix will be a combination of big tax hikes and deep spending cuts.
