Why the U.S. needs to take a long, hard look at the size of its government

Prohibitions against shooting the messenger have been forgotten in the midst of the current financial crisis.

Last week Standard & Poor’s credit rating agency expressed publicly what everyone has been thinking for some time: that the United States does not have a credible plan to address its mounting deficit and debt. Net federal government debt as a percentage of GDP is predicted to rise from 74 per cent to 85 per cent by 2021. (Canada is at 34 per cent.) As a result, S&P stripped the U.S. of its AAA credit rating.

Reaction from the White House was furious. Treasury Secretary Tim Geithner said, “S&P has shown really terrible judgment and they’ve handled themselves poorly, and they have shown a stunning lack of knowledge about basic U.S. fiscal math.” Yet any complaint that the rating agency is being too tough on Washington is the height of hypocrisy.

This past January, the U.S. government released the findings of the Financial Crisis Inquiry Commission, which specifically blamed rating agencies for being too soft on mortgage lenders and their subprime securities in 2008. “Credit rating agencies were key enablers of the financial meltdown,” it reported. Too soft in 2008. Too tough in 2011.

Of course the real issue facing Barack Obama’s administration is not how to keep credit rating agencies compliant with official thinking, but how to return the American economy to the robust and dynamic powerhouse it has been throughout its history.

This is not the first time the U.S. has faced forbidding financial times. In 1802, President Thomas Jefferson cut the army in half and dry-docked a third of the navy’s major ships in an effort to get the federal debt under control. A wrenching recession in the 1890s precipitated widespread industrial violence and a severe fiscal crisis in Washington. We can’t forget the Great Depression, of course, and most Americans would probably prefer to forget the 1970s, with two OPEC crises, stagflation and the near-bankruptcy of New York City, not to mention bell-bottom pants.

Regardless of the previous circumstances or era, however, the U.S. has always managed to rebound from its darkest days. Its political system often appears chaotic and confrontational, but in times of crisis it has always proven sufficiently flexible. And the economy has always encouraged maximum innovation and effort through minimum interference and low taxes. The danger is that this time may be different, due to the fact that the U.S. may now be different.

Acclaimed columnist Mark Steyn returns to our pages this issue with a look at the current crisis in an exclusive excerpt from his new book, After America: Get Ready for Armageddon (see page 38). Together with this story by Jason Kirby, a disturbing picture of a newly inflexible and debt-burdened America emerges.

As Standard & Poor’s points out, while AAA-rated countries are on track to reduce their debt in the near future, “the trajectory of the U.S.’s net public debt is diverging from the others.” U.S. debt is projected to keep growing, fuelled by past stimulus deals, enlarging social programs, interest expenses and political brinkmanship. The deeply polarized 111th Congress of the United States (from 2009 to 2011) has run up more debt than the first 100 Congresses (1789 to 1989) combined.

In his darkly humorous style, Steyn looks past this orgy of debt to ponder how and why the U.S. has strayed. The reason, he observes, is to be found in the massive government involvement in everyone’s lives. Later in his book, he explains how community bake sales have become illegal in Pennsylvania due to increased food-safety regulations, a situation that has stymied efforts of the local citizenry to fix their own problems. In New Hampshire, stonemasons are required to attend federally sanctioned “ladder school” in order to bid on institutional work. Nothing, it seems, can be done without state consent or control. And big government inevitably leads to big debt. “Without meaningful course correction,” Steyn writes in our excerpt, “America is doomed.”

What will such a course correction look like? Clearly the U.S., along with the rest of the Western world, must wean itself off the notion that current spending can be paid for with IOUs on future generations. This slow, painful and necessary process will leave many people disappointed at their loss of entitlements; nonetheless, government must be made affordable for current taxpayers. It will also be necessary to scale back government interference in everyday life, at least to the extent homemade pies are legal once more.

Fixing America is not a matter of browbeating credit rating agencies. It’s about coming to terms with the size and role of government in a country’s life.