The Black Swan Looms Over Budget


             As I write this, cable and broadcast television, radio, and bloggers, and government officials, are giddy with the news released 90 minutes ago that the economy created almost 300,000 jobs last month. 

     “We’ve turned the economic corner.”

      “The recovery has become self-sustaining.”

      “That 1,000 point drop in the Dow was merely because of a human being putting erroneous sell information into a computer,”

      Yet, the official unemployment rate increased to 9.9 per cent and the broadest measure of unemployment continues to rise.  How can this be?  Are good times here again?

      In short, “no.”


  America faces three major challenges, hidden within the headline data.

           1)  It will take more than 4 years of 300-400,000 per month in job gains for the nation to reach the employment levels of three years ago, and the Federal Reserve estimate is that the economy must create 275,000 jobs a month merely to accommodate newcomers to the job market. Thus,  Federal deficits may expand from the already-outrageous levels anticipated.

           2)  Will global sovereign debt instability (i.e., Greece, Portugal, Spain, Italy and Ireland) continue to drive investors toward the safe haven of American markets and the American dollar, and what happens when those investors find other places for their money.  That reaction would increase interest costs on Treasury debt.

           3)  When Americans look at Greece’s finances are they really looking at the United States just a few  years from now?

      We are not creating enough private sector jobs and deficits will expand;    global investors won’t find American markets as the only safe havens forever and interest rates seem destined to move higher;  and, while Greece’s Gross Domestic Product isn’t as large as New York’s, Greek fiscal and entitlement policy presage America’s.  And, America is “too big to fail,” unlike Greece.

      The easy answers have been tried–the Fed’s quantitative easing and purchase of mortgage back securities, zero per cent interest rates for months and months on end,direct government aid to financial institutions and car manufacturers, and fiscal stimulant through various

 “jobs” programs passed by Congress.

      At the risk of repetition–even with projected annual economic growth of more than 3 per cent for the next decade, under current policy all serious budget analysts foresee American debt to GDP ratios of more than 100 per cent.  Under current policy, interest payments alone on our sovereign debt will exceed $1 trillion a year within the decade.  At that level, interest payments will exceed all projected spending on discretionary spending–defense, transportation, health research, education, agriculture and all other non-entitlement spending.

      This will occur while America’s international and defense challenges may well be greater than they are now, and while tens of millions of Baby Boomers begin to get Medicare and Social Security.  In short, fiscal matters worsen dramatically over time.

      While most Americans cannot recite chapter and verse of our fiscal mess, they sense the problem.  Most of them under 40 don’t think Social Security will be there for them.  They doubt Medicare will contribute as much as they have been led to believe it will toward  increasingly-expensive health care costs. More and more of them are scared, and angry, at what they believe is a profligate federal government.

      Yet, when asked if they think Social Security and Medicare need to be curtailed for future beneficiaries, most polled Americans  say “no.”  In Greece, the people say no by rioting in the streets.  Americans will say no at the ballot box.

      This puts policymakers in a deep quandry.  Drastic changes in Social Security and Medicare that would take effect very quickly threaten the  weak economic recovery.  Changes in those two  programs that take effect gradually over time won’t cut deficit projections, leaving politicians with the worst of all worlds electorally–getting the blame for tampering with Social Security and Medicare, but not receiving the benefit of real deficit reduction by the time their next election comes around.

     Increasing taxes is as popular as ever, especially in a relatively high unemployment world.

      Most human beings reject suicide.  Politicians are human beings.  They reject political suicide.  Yet, that is what most of them think will result from efforts to

fundamentally cut American debt and deficits  through spending cuts and tax increases.

     My prediction–Americans will muddle through, as will their political representatives, until global markets refuse to buy the next Treasury auction or market bond vigilantes push up interest rates. Then, conventional wisdom holds, Americans will tolerate fundamental fiscal reform. I don’t think things are that linear.  I think that a “Black Swan” event (a “quantum” event) will take place, enervating America’s economic future much more quickly than most analysts do. 

      And no one knows what that will mean for economic growth and jobs.

Editor’s Note: Steve Bell is a Visiting Scholar at the BiPartisan Policy Center at Washington, D.C., and a consultant to financial firms.