Jewish World Review Nov. 19, 2004 / 6 Kislev, 5765

Froma Harrop

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Consumer Reports

This disaster flick could leave you broke


http://www.jewishworldreview.com | If Hollywood made a disaster movie about the economy, it might start like this:


Economists sit around the control room and share their grave concerns about spiraling federal debt. They enter lots of data, and out comes a list of terrifying scenarios. They run to Washington with warnings of the threat ahead, but the politicians accuse them of making "sensationalist claims." Ignored, the economists go back to their monitors and nervously await the calamities to follow.


First come the twin tornadoes of the budget and trade deficits. They send interest rates flying into the upper troposphere.


Then the foreigners flee. That's bad. Washington has paid for its spending by borrowing about $2 billion a day from overseas investors. Fed Chairman Alan Greenspan worries that these people might lose confidence in the American economy and pull out their money. This could create a "debt maelstrom," he says.


To keep the foreigners happy, the United States might have to pay them still more. "If the markets begin to fear long-term fiscal disarray," says former Treasury Secretary Robert Rubin, our lenders could "demand sharply higher interest rates for long-term debt, with all the problems that may lead to for markets and our economy."


While the falling U.S. dollar further displeases foreign investors, it is supposed to help American companies compete globally. So far, it hasn't. Goldman Sachs cautions that the current account deficit (the broadest measure of trade) will continue growing in 2005 -- and equal 5.7 percent of our $11.6 trillion economy. The weakening dollar, meanwhile, has raised the cost of imports, spurring new inflation fears. Wholesale prices last month scored their biggest jump in almost 15 years.

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What about the creeping glacier of personal debt? Envision the American consumer frozen in place, mere steps from the shopping mall. He can't borrow any more on his house. His credit cards are maxed. Higher interest rates have shrunk what was left of his borrowing power. Americans stop spending, and the economy takes a dive.


These days, no self-respecting disaster movie relies on one catastrophe. Eventually, the systems merge into one huge super-storm.


So let us imagine the tornadoes of rising interest rates setting off the freeze in consumer and business spending. The financial markets have a nervous breakdown, and finally the government has to do something about its borrowing.


One option is to raise taxes. But that would unleash taxpayer fury packing Category 5 winds. Expect one big blow when Americans open the tax bill for all this government spending, plus interest.


The other option is to cut government spending. This would trigger a massive heat wave of citizen outrage. You can see the smoke coming out of senior citizens' ears as their Medicare benefits get chopped.


The really bad news is that tomorrow's numbers are scarier than today's numbers. The wave of baby boom retirees will soon merge with surging budget deficits to form one heck of a typhoon.


Boston University economist Laurence Kotlikoff rings these alarms in his book "The Coming Generational Storm." And he accuses our "leaders" of ignoring the "implied debt" -- the long-term costs of Medicare, Medicaid and Social Security -- in their calculations.


In the sunny days of prudent budgeting, older Americans could compel politicians to protect their benefits. But an economic meltdown will crack their power. Their cries will not be heard over the din of crashing markets and screaming taxpayers. Expect older Americans to fight younger workers for shelter, as hail the size of basketballs rains down on everyone.


In his book "Running on Empty," former Commerce Secretary Peter Peterson explains why today's politicians have done nothing to head off the crisis: They figure they'll be long gone when the lunacy of mounting deficits hits with cataclysmic force.


But hit it will. As economist Herbert Stein put it, "If something is unsustainable, it tends to stop."


That sounds a lot like the Randy Quaid character in "The Day After Tomorrow," a disaster movie about global warming. "The basic rule of storms," scientist Quaid says, "is they continue until the imbalance that created them is corrected."


All disaster movies end with the president addressing a traumatized nation and promising to rebuild. And someone always says, "Too bad they wouldn't listen."



Froma Harrop is a columnist for The Providence Journal. Comment by clicking here.

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