A Republican takeover of the House may be the only thing between the U.S. and the abyss.
The world economy shuddered last week as a rating company downgrade of Greek debt set off fears of default. Investors decided to beware of Greeks bearing bonds, and markets stumbled.
While the economic data are showing signs of a recovery, there is a genuine risk that the book on this financial crisis has yet to be completed. We may not even have reached the climax.
Governments around the world have propped up their failing financial institutions with borrowed money. We used to have overleveraged banks; we replaced them with overleveraged governments.
Panics start small and spread. If Greece goes down, almost every Western government will be at risk.
The sad fact is that Greece is hardly exceptional when it comes to fiscal insanity. If the current Greek budget outlook proves to be accurate, then its deficit over this year and next will average a whopping 10.9 percent of gross domestic product. Small wonder that investors headed for the exits. A deficit that high could easily turn into a fiasco.
As bad as that picture is, it's worse in the U.S. Our deficit this year, according to the latest estimate from the Congressional Budget Office, will be 11.2 percent of gross domestic product.
"Catastrophic Budget Failure"
Syracuse University economist Len Burman, the modest and sober budget expert who was a top official in President Bill Clinton's Treasury Department, told the Washington Post that according to a model he has developed to study the current situation, a "catastrophic budget failure" might happen.
Burman added, "I try not to get too depressed, because if I really thought it was going to play out the way this model works, I would just move to a cabin in Montana and stockpile gold and guns."
The worst need not happen, of course. For the U.S., a clear and reliable indication that our government takes the situation seriously, and plans to address our terrible fiscal plight with tough policy moves, might assuage markets.
Here is what the Democrats have done instead.
Health experts have for years been advocating the adoption of so-called game changers, such as reducing physician reimbursements, that could significantly reduce health-care spending. Under current law, Medicare and Medicaid are on a terrifying path to insolvency, having promised tens of trillions more in benefits than we can afford. The plan was to use these game changers to fix the government programs.
Instead, President Barack Obama and his Democratic colleagues have decided to bundle the game changers with a massive expansion of health spending. While they crow about the budget neutrality of the emerging health bill, they have essentially passed on the opportunity to fix the already broken system.
A bill that contained only the game changers would have been fiscally responsible. A bill that spends all the savings on new initiatives moves poor Mr. Burman one step closer to a bunker in Montana.
It is hard to imagine what other steps we might take in the future to reduce health spending. Obamacare loads us onto a runaway train.
Outside of health care, Democrats have been little more responsible stewards than their Republican predecessors. Last week, the House passed a budget that included a whopping 5,224 earmarks. The bill included funds for such high-priority projects as the Aquatic Adventures Science Education Foundation in San Diego, a water-taxi service for a Connecticut beach town and new bike racks in Washington's Georgetown neighborhood.
Take a Walk
World capital markets are looking for us to signal that we are serious. In response, we give them new museum exhibits, scenic running trails and decorative sidewalks.
While the total fiscal damage from the earmarks is relatively slight in the scale of things--last week's binge cost taxpayers $3.9 billion--the spending spree signals a clear lack of appreciation of this seriousness of the situation.
And the cumulative damage is eye-popping. When Nancy Pelosi took over as speaker of the House in 2007, U.S. government spending was projected by the CBO to be $2.9 trillion for 2009. Instead, it was about $3.7 trillion. That bad news sticks, with spending ratcheted up as far as the eye can see. First with a Republican and now with a Democrat in the White House, congressional Democrats have increased spending and shown no inclination to stop, even as deficits have skyrocketed.
More to Come
Last week's House budget vote suggests that the current spending trend will continue. If so, there are two likely endgames.
The first is a takeover of at least one branch of Congress by Republicans. Divided government created a political dynamic that delivered budget sanity when Clinton was president, and it might do so again. Given the failure of both Republicans and Democrats to govern sensibly as the dominant party, divided government may be our only hope.
In the second scenario, Democrats continue to rule as they currently are. Anyone who wants to understand better where that will lead should call up the Greeks.
Kevin A. Hassett a senior fellow and the director of economic policy studies at AEI.