1/9/2013 7:45 PM ET|
Why $16.4 trillion debt isn't enough
We have to pay the bills and fix the economy, but we also need to set a course for a solvent future. As the debt ceiling and other crises loom, Washington doesn't seem up to the task.
Despite what Wall Street thought, the last-minute, middle-of-the-night fiscal cliff deal was a dud. Not only did it raise taxes on nearly 80% of Americans and ignore the spending that's the root cause of the deficit and long-term debt problem, but the animosity it engendered also dropped more poison into the dry well of bipartisanship in Washington.
Count the victories: Lower- and middle-income Americans avoided a $120 billion income tax hike this year but will be hit with a $120 billion payroll tax hike instead. The rich face a $70 billion income tax hike. The $100 billion or so in spending cuts, the "sequester," was delayed by a measly 60 days.
But now America faces an even larger precipice: a combination of the debt ceiling, the sequester and the end of the continuing resolution funding the government in lieu of an actual budget. The fun is set to start as soon as Feb. 15, which is the earliest the Bipartisan Policy Center believes the U.S. Treasury could exhaust its cash reserves -- forcing us to raise the debt ceiling, default on the national debt or sharply cut discretionary spending.
We're on a collision course with fiscal reality. There is no more pretending it isn't there -- the Pentagon says the problem is so big that it jeopardizes our national security. For too long, rhetoric has alternated between Democrats promising goodies and Republicans promising to not make us pay for them. There are no easy solutions left; the bills have come due.
The least-disruptive option, of course, is to raise the $16.4 trillion debt limit. America will, at least in the short term, need to borrow more. Part of this is because the economy is deficient and in need of critical investments from the government. And part of it is because Washington is a long way from addressing the root cause of the problem.
And as a result, the country's debt -- which totals more than $52,000 for every man, woman and child in this country -- just isn't enough. It's not even close.
But we also need to wake up to the fact that the time to fix this is short. The credit agencies and our foreign creditors grow increasingly impatient with our budget petulance.
Washington just doesn't get it.
President Barack Obama and the Republicans in Congress are preoccupied with pointing the finger at the other party -- not fixing the structural problems of a weak, debt-hobbled economy and out-of-control health-care costs, both of which have been decades in the making. Slivers of hope during the fiscal cliff negotiations, including discussions of changing how Social Security benefits are calculated (by changing how inflation is measured) and raising the Medicare eligibility age (to match the Social Security full retirement age), were quickly abandoned to focus on the old tropes of the rich versus the middle class, paying "fair shares" and punishing job creators.
The result was a deal that merely delayed the pain without changing the long-term debt trajectory. The chart above shows our course quite clearly.
The Congressional Budget Office estimates that, compared with the full force of the fiscal cliff (had we gone over it), the deal adds $4.6 trillion to budget deficits over the next 10 years -- a deficit the CBO believes will total nearly $10 trillion, enough to take the national debt to an incomprehensible $27 trillion by 2022.
By then, according to Credit Suisse estimates, almost all of America's tax revenue will be going to entitlement programs and interest payments on the debt. Spending on everything else -- including bullets and jet fuel -- will add to the debt load. A weaker-than-expected economy or higher-than-expected interest rates will bring the day of reckoning closer.
Troublingly, the bickering has already started anew.
Before he even signed the fiscal cliff deal into law, Obama said he wouldn't negotiate over the Treasury's borrowing limit and that any new spending cuts would need to be offset by additional tax hikes. Over the weekend, Senate Minority Leader Mitch McConnell, R-Ky., delivered a riposte, saying that Republicans are "done raising taxes" and that any increase in the debt ceiling would need to be accompanied by significant entitlement cuts. House Speaker John Boehner, R-Ohio, echoed these sentiments.
In other words, both sides have returned to their corners to pout and fold their arms. Meanwhile, most Americans are starry-eyed from the stock market's rise, focused on the jump in small caps represented by the iSharesRussell 2000 Index (IWM), and blissfully unaware of what's coming.
The farce will end soon. The deadlines we now face cannot be delayed as easily as the earlier ones. And even if they were, the credit-rating agencies have threatened that, without action to at least stabilize the trajectory of the national debt, they will downgrade us -- setting the stage for a repeat of the August 2011 market meltdown caused by the loss of America's AAA rating from Standard & Poor's.
No easy answers
Why is the task of balancing this budget so hard?
For one, part of the deficit is "cyclical" and caused by the weak, credit-addled economy, bombed-out home prices and a subpar jobs recovery. Tax revenues are low, not only because we've been enjoying the Bush tax cuts and Obama's payroll tax cuts, but also because the employment-to-population ratio has fallen to levels last seen in 1981. Moreover, growth is weak because business owners and executives aren't investing enough in new equipment and employees -- in large part because of fears of higher taxes.
And the government has been running huge deficits, not just because of Bush's stimulus checks and Obama's $787 billion stimulus spending, but because it's been facilitating the deleveraging of the rest of the economy. Overly indebted households passed losses to the banks via mortgage defaults, which passed the losses to the government via the $700 billion bank bailout and FDIC-funded bank closures.
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Finally we are seeing more of the media get on board with the notion that our bloated Government needs to be downsized and many reforms taken into consideration. Once upon a time in the land of milk and honey, American's bought our own debt from the Treasury via war bonds, EE bonds and other instruments that offered the incentive to save and be rewarded with a decent interest rates. Are those days forgotten? Are those days ever to be relived? By servicing our own wounds, caused by self infliction, would that be considered protectionism?
The here and now crowd, the i got mine screw you crowd, may end up ponying up after all. The time for fiscal sanity has been long overdue and our projected spending and borrowing was a direct result of the 2010 Tea Party activist bringing the debt and spending issue to a head. Now most Americans will continue to learn, piece by piece, what kind of action, what kind of pain, and what the future will hold for our youngest of young who haven't even enter the workforce yet. A downgrade in the quality of life and a remembrance of JFK famous words.
Obama knows his first term saw 4 years of recession, all he blames on his predecessor. He also knows he cannot, at the end of his 2 term, leave saying "it's still Bush's fault." He knows there is no way possible to put a significant dent in our $16 trillion debt with his remaining four years. We take in $2.5 trill, we spend $3.8. He could cut spending by $4 trillion in his next 4 years and the debt would still be… $16 trillion. And further, assuming he did cut spending by, 25% or $1 trillion per year, would Obama prefer his legacy to be "the guy that cut spending and held the debt to $16 trillion" or would he prefer his legacy to be fulfilled continuing to play "Robin Hood" with health care, food stamps, unemployment, and funding education/services for illegals and more? For him, it’s a no brainer. President Obama, at the outset of his first term, could have chosen a legacy of one that re-engineers government, dramatically reducing costs while improving service and transparency through utilization of technologies available in the 21st century... but with 70% of the cost of government being government jobs and benefits, that means reducing government jobs… and there is no way that's gonna' happen in his Sherwood Forrest. Or the Republican's. Obama must raise the debt. His legacy gives him no choice.
Until Republicans in Congress face the root causes of our debt, there will be no solution, after 4 balanced budgets republicans took the White House in 2001, after that it's been all bad.
#1 They cut taxes to record lows, causing revenues to fall from over 20% of GDP to a low of 14%, the average is about 18%. The GDP is about $15 trillion, a 6% lose in revenue is about $800 billion per year, almost enough to balance the budget today.
#2 Military spending more than doubled in 8 years from just over $300 billion to over $700 billion, a $400 billion annual increase with no way to fund it. You just can't do that.
#3 Healthcare cost have also more than doubled in 10 years from $389 billion in 2001 to a projected $916 billion this year, a $527 billion dollar annual increase.
Congress must take action on the root of the problem, everything else to these three items is just garnish on the plate. Republicans must deal with there Demon's at some point.
Until the trend of lower wages and benefits combined with higher prices that began in the early 1980s is reversed 180 degrees, I see no real hope for a vigorous economy.
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