Andrew Friedman Says Deficit Will Push U.S. Into Grim Economic Future

The fight over the 2011 budget that nearly shut down the government earlier this year — Republicans wanted to cut $60 billion, Democrats $10 billion — is an indication to Friedman of the unreality of U.S. politics today. Given the magnitude of our $1.6 trillion deficit in 2011, the achieved spending cuts — the two sides eventually compromised at $38 billion —are too trivially small to make an impact on our economic situation.

Friedman predicts an end to this paralysis, but he says: “It will be forced on us. And it won’t be pretty.” He says the Chinese will slow down purchases of U.S. government debt, forcing the U.S. to raise interest rates, which will cripple our already ailing economy. What he calls “forcing events” — external prompts to action — are exactly what has happened to Greece, Ireland and Portugal. Indeed, as in the cases of those countries, the IMF has already issued a report chastising the U.S. for having no plan to deal with its debt. Closer to home, Standard & Poor’s last month revised its long-term rating on U.S. sovereign AAA debt to negative from stable, and warned that failure to address government indebtedness could jeopardizes our AAA rating within two years.

Friedman doesn’t think anyone in Washington is going to allow the U.S. to lose its AAA rating, but he concluded that today’s policy choices are direr than in the past, when raising taxes or cutting spending were realistic alternatives. In today’s environment when most spending is entitled, cutting spending means taking promised benefits away from citizens who feel they have earned them, which might be impossible to do without imposing tax hikes on workers as part of a political compromise where everybody bears some of the pain. Friedman predicts we will see a combination of spending cuts, including means testing of entitlement benefits; fee increases (higher Medicare co-pays, for example); and increased taxes in years to come.