To Avoid A Debt Crisis Look To … Canada And Sweden?

I&I Editorial

On Thursday, Treasurer Secretary Steven Mnuchin tried to reassure markets by saying that a debt ceiling deal is within reach. 

“I don’t think the market should be concerned,” he told CNBC. “I think everybody is in agreement that we won’t do anything that puts the U.S. government at risk in terms of our issue of defaulting. I think that nobody wants a shutdown in any scenario.”

That would be comforting if defaulting on the debt or a government shutdown were the only problems we faced. During the last lengthy shutdown — which economists assured us would cause a recession — GDP growth accelerated. And even if Congress didn’t raise the debt ceiling, it would only mean the government couldn’t borrow more money. If the Treasury couldn’t borrow any money this fiscal year, it could still pay all interest payments on existing debt, pay all Social Security benefits, cover every Medicare and Medicaid bill, and fully fund the Pentagon. And there’d still be $265 billion left to help the poor. 

It’s not the debt ceiling debate that anyone should be concerned about. It’s the explosive debt itself – and the fact that Congress refuses to get control of the spending that’s driving it upward. 

Since the recession ended in June 2009, the national debt has nearly doubled to $22 trillion. In the past two years alone, it’s gone up by $2 trillion. Anyone who has looked at the trend going forward knows that it leads to economic catastrophe.

The tragedy is that we know how to get off this road.  All you have to do is look 568 miles north of Washington, D.C., to get the answer.

Like the U.S. today, Canada’s debt was spiraling out of control in the late 1980s. By the mid-1990s, Canada’s federal debt accounted for 67% of its GDP, and interest payments accounted for 30% of the government’s budget. 

Chris Edwards, director of tax policy studies at the Cato Institute, explains that Canada’s debt crisis “scared away investors and the economy struggled. Canada’s federal debt was downgraded by the rating agencies, and a Wall Street Journal editorial called the country a ‘basket case.’”

Rather than squabble over pointless debt ceilings, the country realized it had a massive spending problem. It slashed spending by 10% in about two years, then held it flat for several years after that. As Edwards notes, it “cut defense, business subsidies, farm aid, welfare, grants to lower governments, federal jobs and much else.” 

By 2006, federal spending as a share of GDP had dropped by 10 percentage points, and Canada’s debt had shrunk to 34% of GDP.

“The Canadian economy did not sink into a recession as Keynesian economists might fear, but instead was launched on a 15-year economic boom,” he notes.

Liberals love to cite Canada as a model of how the U.S. should do things. But somehow that country’s determination to get spending under control never seems to register with the left, which is now talking up plans to double the size of the U.S. federal government. 

There’s another country the left loves that also shows how spending restraint is the cure for a debt crisis. 

Heritage Foundation budget expert Romina Boccia notes that Sweden also faced a severe crisis in the 1990s. Like Canada, the country “adopted a comprehensive fiscal framework anchored by sensible fiscal targets and enforced by spending and tax limits.”

She notes that Sweden “does not have open-ended entitlement programs that grow, regardless of available revenue.” That would certainly come as news to Bernie Sanders and AOC.

Boccia says that Sweden, having tamed its spending, is now looking to cut taxes, “thanks to balanced budgets that have kept social welfare spending in check.”

You don’t even have to look abroad to see how modest spending restraint can turn the country off its current fiscal course. After the Republicans took control of Congress in 1995, they imposed strict spending limits on the Clinton administration. In fact, overall spending growth averaged just 3% from 1994 to 1999. The economy boomed, and the budget went from a $255 billion deficit to a $236 billion surplus in just six years.

When Republicans regained the House in 2011, they again hit the brakes on spending, to the point where outlays were lower in 2014 than they were in 2011. The deficit collapsed from $1.3 trillion to $441 billion in four years.

Unfortunately, some of the most profligate years have been when Republicans controlled both Congress and the White House — both under President Bush and now under President Trump.

In the past two years alone, spending has climbed by almost 14%. And there’s no discussion whatsoever about getting entitlements under control.

It’s not too late for the U.S. to avoid a debt calamity. But we shouldn’t wait until we’re in a Canadian or Swedish style crisis to act.

— Written by John Merline

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