Stock Market Making the Case for Cuts

That queasy feeling Americans had in September 2008 when the bottom fell out of the financial markets has returned. Is the American economy slipping back into recession?

Last week, the Dow Jones industrial average lost 699 points, or 5.75 percent. After the stock market closed last Friday, Standard & Poor's, one of the Big Three credit-rating agencies, announced it had lowered its rating of the U.S. government's credit, to AA-plus from AAA. It was the firm's first-ever downgrading of U.S. creditworthiness from the top rung. Markets plunged again Monday, with the Dow declining another 634 points, or 5.5 percent.

Conditions deteriorated last week after Congress passed a bill raising the debt ceiling by $2.7 trillion, to $17 trillion, which was supposed to stabilize markets. The debt number is staggering. U.S. gross domestic product will be about $15 trillion this year.

Federal spending in the past 10 years has jumped from 19 percent of GDP to just under 25 percent. Since World War II, federal spending has averaged about 20 percent, with budget problems hitting every time that level is exceeded.

"The markets are concerned about the size of government in the short term, but especially in the long term," Dan Mitchell told us; he's an economist and senior fellow at the libertarian Cato Institute.

"Unfunded liabilities are more than $100 trillion." He's referring to not just the $17 trillion in budget debt, but money also promised to Social Security and Medicare recipients as those funds become more insolvent.

Mr. Mitchell criticized President Barack Obama for not taking the crisis seriously. "Obama is demagoguing on Social Security and Medicare. It's just a dangerous recipe," Mitchell said.

We hope that members of the U.S. House of Representatives take a more active role in pushing major budget cuts. As with a family budget, a national budget with such heavy debt cannot thrive. The only way America can rebound from this crisis is by making much bigger cuts in government spending. Tax increases only would crash the economy faster and make matters worse.

REPRINTED FROM THE ORANGE COUNTY REGISTER

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