An international addiction to debt plagues both Japan and California.
“Yukio Hatoyama, the new Japanese Prime Minister, has stunned a nation already mired in huge public debt by unveiling the country's biggest ever postwar budget,” reported the UK Times the other day. Hatoyama's budget of 92.3 trillion yen – roughly $1 trillion – represents a jump of some 10 percent over last year's figure.
It goes without saying that the Japanese government does not have enough cash to pay for this extravaganza. In order to cover its bills, it will have to borrow a record 44.3 trillion yen ($440 billion), which will push the country's public debt to nearly 195 percent GDP. This figure represents the largest debt-to-GDP ratio by far of any developed country. This increase in indebtedness comes at a time when tax revenues are projected to fall to the lowest level since 1984. According to projections, the amount of Japan's debt issuance next year will exceed the government's tax intake. This will mark a historic milestone of sorts, as Japan has not experienced this level of imbalance since the end of World War II.
It is ironic that Hayotama was swept to power in August on the promise that he would end the era of wasteful public spending that marred the rule of the previous government. Today Hatoyama says that the sharp increase in public outlays is necessary, because it is aimed at “saving people's lives.” At the same time, he seeks to convince the Japanese public that fiscally things are still under control. “I believe that we have delivered all we can without compromising fiscal discipline,” said Hatoyama at a news conference last week. But with a debt of nearly double the country's annual economic output his words hardly sound reassuring.
Unfortunately, Japanese politicians are not the only ones suffering from a bad case of the unhinged spending syndrome. Their American counterparts are also badly afflicted by this pernicious malady. In its latest outbreak, California's Governor Arnold Schwarzenegger has petitioned the federal government for help in closing the California's $21 billion budget gap. In other words, Schwarzenegger is seeking a bailout for his insolvent state. The governor has been hard at work cultivating the political soil to make D.C. receptive to his plea. This is a somewhat delicate undertaking for a republican these days, given that Washington's financial strings are largely controlled by democrats. But Governor Schwarzenegger has apparently figured out what it takes to win the favor of those in charge. For months he has enthusiastically praised President Obama and last week even gave him an A for his performance so far.
Schwarzenegger and his cohorts claim that California's financial woes are caused by a weak economy. But this is not so. Strictly speaking, California's problems are not a result of a deteriorating economy, but of the irresponsibility of the state's political class. By offering unsustainably generous social programs, keeping a highly-paid bureaucracy and financing a whole array of extravagant projects they have simply broken the bank. With the damage done, it is time for those responsible to bear the consequences of their actions. They must face the people of California standing on the ashes of their state's burned fiscal house. To bail them out would truly be unforgivable. If the federal government grants them the funds they seek, they will not only not be punished for their recklessness, but they will cast themselves as California's saviors. They will use their bailout loot to further entrench themselves in power and continue their destructive works. These people must not be rewarded; they need to face the music instead.
Sad to say, both parties bear responsibility for California's present woes. Long gone are the days when Arnold Schwarzenegger excoriated his legislators for their fiscal excesses. Calling them “girly men” for lacking the courage to bring the state's finances in order, he held them up to public scorn before the whole nation. But it did not take long for the governator to adopt the spending mindset of the very people he ridiculed and turn into a girly man himself. And today he comes to Washington begging the federal government for other people's money so that he can get out of his pickle.
It is truly paradoxical that Schwarzenegger is asking for help from someone who is even more bankrupt than his own state. With a national debt of over $12 trillion and an entitlement burden in excess of over $100 trillion, the US government is saddled with obligations it cannot possibly meet. If it were not for the dollar's status as the world's reserve currency and the ability of the Federal Reserve to print it at will, our federal government would now be out of business. In any case, its days as a financially viable entity are numbered. Even as we speak, the world is feverishly looking for an alternative to the dollar. Once it is found, our currency will disintegrate as governments and investors will refuse to finance our ever growing debt. It is also possible that they will not wait for an alternative to emerge, but that at some point will simply begin dumping dollars in an effort to cut their loses.
We must never lose sight of what has led to this predicament – excessive spending by the political class. As in the case of California, both parties are culpable. Although Republicans like to cast themselves as the party of fiscal sobriety, the fact is that whenever they hold power they grow both spending and deficits. It seems to be the defining feature of the Western political dynamic that whenever a party assumes power – regardless of whether it is ideologically right or left – it invariably increases government expenditures. Today many charge the Japanese prime minister – who heads a center-left party – with the socialist type of disregard for the basic laws of finance and common sense. The charge is true enough, but they forget that the road was paved by the previous governments, most of which were on the other side of the ideological divide.
The same holds truth for the United States. People fault President Obama for his lack of fiscal restraint. And deservedly so. They, however, overlook the fact that the ground was prepared by the previous administration. That administration, among other things, broke previous spending records, implemented a costly entitlement program and set us on the road to endless bailouts. It is true that republicans are somewhat more restrained than their counterparts across the aisle, but that is not good enough when we are headed for financial disaster.
What we desperately need are adults who realize that we cannot indefinitely go on spending more than we have. Unfortunately, neither side of the Western political mainstream appears to harbor such politicians. Whether you look at Japan, California or the United States, the unhinged spending syndrome does not discriminate. An equal opportunity affliction, it affects both sides regardless of their stated ideological orientation.