Tuesday, November 04, 2003

This Can't Go On:
"Academic economists often cite Stein's Law, a principle enunciated by the late Herbert Stein, chairman of the Council of Economic Advisers during the Nixon administration. The law comes with various wordings; my favorite is: 'Things that can't go on forever, don't.' Believe it or not, that's a useful reminder."

For we're now led by men who think that macho posturing makes Stein's Law go away. On issues ranging from budgets to foreign policy, they insist that we can sustain the unsustainable. And when challenged to explain how, they engage in magical thinking.

The prime example I have hammered on in this column is, of course, the federal budget. Realistic budget projections say that current policies aren't remotely sustainable. For example, a month ago a joint report of the Committee for Economic Development (a business group), the bipartisan Concord Coalition and the Center on Budget and Policy Priorities concluded that under current policies, federal debt would rise by $5 trillion over the next decade. And then baby boomers will start collecting benefits, and our debt will really explode.

Such explosive growth in debt can't go on forever, and it won't. Yet our current leaders and their apologists insist that the problem will magically solve itself. Last year's deficit came in slightly below forecasts, and we've had one quarter of good economic growth — see, we'll grow out of the deficit!

But we won't, and there will eventually be a day of reckoning. As Bill Gross of Pimco, the giant bond manager, says, "Sooner, perhaps later, our Asian creditors will wake up and smell the coffee." (Yes, the federal budget and the value of the dollar now depend on huge purchases of Treasury bills by the governments of Japan and China.) When they do, he predicts "higher import costs, a cutback in spending on cheap foreign goods, rising inflation, perhaps chaotic financial markets, a lower standard of living." Something to look forward to.

But the day of reckoning seems closer on a different front.…

http://www.nytimes.com/2003/11/04/opinion/04KRUG.html

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