US is perfecting formula for budget failure

Obama deficit hawk Erskine Bowles warns of a nightmare scenario that's already in progress and must be dealt with now.

By MSNMoney partner May 1, 2012 2:03PM

By William D. Cohan

 

Erskine Bowles, a true Southern gentleman and the co-chairman of President Barack Obama's erstwhile budget-deficit commission, came to New York City from his home in North Carolina the other night to talk sense about the nation's perilous fiscal condition.

 

"I think today we face the most predictable economic crisis in history," he told an audience on April 24 at the Council on Foreign Relations -- an audience that might actually be able to help do something about the problem. "Fortunately, I think it's also the most avoidable. I think it's clear, if you do simple arithmetic, that the fiscal path that the nation is on is simply not sustainable."

 

Bowles, a Democrat, then laid on the crowd some pretty simple, but devastating, arithmetic. He explained that 100 percent of the tax revenue that entered the Treasury in 2011 went out the door to pay for mandatory spending -- such as Medicare, Medicaid and Social Security -- and to pay the interest on our staggering $15.6 trillion national debt.

 

That means that every single dollar we spent on everything else, including two wars, national defense, homeland security, education, infrastructure, high-value-added research and the like, was borrowed. "And," he warned, "half of it was borrowed from foreign countries. And that is a formula for failure in anybody's book."

 

He said the U.S. is now paying $250 billion a year in interest on the debt, and that is only because, mercifully, interest rates are at historic lows. That's chiefly because investors are more worried about the risk of default by European nations, and because the Fed is doing everything in its power to keep interest rates low. "It's because we're the best-looking horse in the glue factory," he said.

 

If interest rates were normalized, Bowles said, the annual bill would be $600 billion a year. "We'll be spending over $1 trillion on interest alone before you know it," he said. To nervous laughter, he offered the example of the country's obligation, by treaty, to defend Taiwan in the event that China decides to invade the island. "There's only one problem with that," he said. "We'll have to borrow the money from China to do it."

 

But wait, it gets worse. He reminded the audience of the numerous "cliffs" the country faces at the end of 2012 when the George W. Bush tax cuts expire: More than $1.1 trillion will be cut from the budget, about half of which will come from defense because of the infamous "sequester" of last year; the payroll tax cut will expire, as will the "patch" in the alternate minimum tax. "If you add all those up," he said, "it's probably $7 trillion worth of economic events that are going to occur in December. And there's been little to no planning for that."

 

It is every bit as criminally irresponsible for Congress to fail to address this looming crisis as it was for Jimmy Cayne at Bear Stearns, Dick Fuld at Lehman Brothers and Martin Sullivan at AIG to ignore the financial problems at their firms in 2008.

 

Interestingly, Bowles remains optimistic that the circumstances are so dire that Congress will have to act, although it probably won't happen until the seven weeks between Election Day and the end of the year. "We have to," he said. "We've simply made promises that we can't keep."

 

The big driver is clear, he said: "We have a health care system that's absolutely crazy. We spend twice as much as any other developed country in the world on health care, whether you talk about it as a percent of GDP or on a per-capita basis. And that might be OK if we could afford it, and it might be OK if the outcomes were any good. But if you look at most outcome measures, we rank somewhere between 25th and 50th in such important measures as infant mortality and preventable deaths and life expectancy. And anybody who thinks those 50 million people who don't have health-care insurance don't get health care, you're just wrong. They get health care, they just get it at the emergency room at five to seven times the cost it would be in a doctor's office. And that cost doesn't go away, it gets cost-shifted."

 

Despite the March 28 defeat of a budget based on the Simpson-Bowles plan by a House vote of 382 to 38, Bowles believes a version will have to get adopted before we fall off the cliff at the end of year. He has spent much of the last year putting the plan into legislative language that has increased its page count to more than 800 pages, from 67, and has put real numbers to the various proposals.

 

"It's a nightmare to do, but it absolutely is necessary," he said. He added that Simpson-Bowles is the "gold standard" for figuring a way out of our fiscal mess, with its combination of revenue increases, spending cuts and tax reform. He allowed that "most people" think there will be agreement on reducing the deficit by $4 trillion, the "minimum amount you need to reduce the deficit to stabilize the debt and get it on a downward path as a percent of GDP."

 

Without serious debt reduction, it won't take much of an increase in interest rates to create a fiscal crisis for the country the likes of which only those who lived through the Great Depression can recall. Once interest rates reach a level that reflects the genuine risk inherent in our ongoing fiscal mismanagement, and debt-service eats up more and more of a shrinking pie, the financial crisis we just lived through (and are still living through) will seem like a sideshow.

 

"Deficits are truly like a cancer," Bowles said, "and over time they are going to destroy our country from within."


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17Comments
May 1, 2012 4:20PM
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Government can't solve this issue because they are the problem and they will never change, their jobs are more important to them than doing the right thing.  Nuff said.
May 1, 2012 8:45PM
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Very very simple. You spend less than you take in. No one is smart enough to tell the King he has no cloths. In simple terms, you can not run your home on debt nor can you run a country, regardless of what some phsycos want you to believe.
May 2, 2012 10:13AM
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In any civilization past, present or future, under any form of government, dictator, king, pharaoh communism, bureaucracy, republic or congress, there is only one person that is responsible and you meet when you look in the minor to comb your hair, put on you makeup or shave your face. That is the person responsible!!! We can no long blame democrats, republicans, conservatives, liberals, congress, the president or the news media. We are the one’s responsible.

When we abrogate our responsibilities to any form of government, that government will eventually make us their slaves. We are the slaves of personal and federal debt that we will never pay off and vested interests that own our congress. We are the people who let this happen and we have only ourselves to blame. We have voted ourselves funds from the public trust to the point that we are bankrupt.

May 3, 2012 9:30PM
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We have alot of things to fix in this country. I agree wih Mr Bowles and Alan Simpson. This needs to be fixed here and now! The current spineless senate and political leaders would have us kicking the can down the road forever.  Then label it as heartless people who would kick granny off the cliff. The real truth is. We may all be hanging off that cliff sooner than we think. If we don't fix the deficit problems right now!
May 2, 2012 3:07PM
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If only Mr Bowles could convince Democrats, Republicans, Independents and Whatever to listen and take heed.
May 4, 2012 5:15AM
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"When the people find that they can vote themselves money, that will herald the end of the republic."

 

-Ben Franklin

May 2, 2012 3:16PM
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Keep kicking the can down the road until you run out of road.  Someone has to pay when the can stops.  Smile
May 4, 2012 5:17AM
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"Democracy is a form of government that cannot long survive, for as soon as the people learn that they have a voice in the fiscal policies of the government, they will move to vote for themselves all the money in the treasury, and bankrupt the nation."

— Karl Marx

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Mr. Bowles said, "But wait, it gets worse. He reminded the audience of the numerous "cliffs" the country faces at the end of 2012 when the George W. Bush tax cuts expire: More than $1.1 trillion will be cut from the budget, about half of which will come from defense because of the infamous "sequester" of last year; the payroll tax cut will expire, as will the "patch" in the alternate minimum tax. "If you add all those up," he said, "it's probably $7 trillion worth of economic events that are going to occur in December. And there's been little to no planning for that."

 

I agree with Mr. Bowles on most of his speech; however, his statement concerning the Bush Tax Cuts is false. By law the Bush Tax Cuts expired December 21, 2010.

 

When President signed "The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010," on December 17, 2010, he took ownership of the so called tax cut for the rich. This act had a total cost of $858 billion of which the extention of the tax cut for the rich was $120 billion.

 

Like a true Democrat Mr. Bowles wants to blame it all on President Bush.

 

May 6, 2012 5:48PM
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When President signed "The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010," on December 17, 2010, he took ownership of the so called tax cut for the rich. This act had a total cost of $858 billion of which the extention of the tax cut for the rich was $120 billion.

 

Like a true Democrat Mr. Bowles wants to blame it all on President Bush.

Someone, like a true blind eye Republican, you want to pretend they had no part in bringing about this extention when in fact it was the price demanded by the Republicans for passage of the act.
May 9, 2012 1:02AM
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Two words: "Term Limits"  If legislators had to earn a living in the world they created the would be more interested in making the economy work.

May 3, 2012 9:45PM
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Quite pathetic actually.  Bowles/Simpson were hired to make a real proposal. They were not even paid attention to. Now folks are saying they got a point. Well Duhhhh. We spend more than we take in for crying out loud. That is the problem. To suggest cuts to medicare and Social security is stupid. The money is in Defense spending. We can make all areas more efficient, but defense can be cut a lot.
May 3, 2012 3:47PM
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it is time for our government to  make those nasty cuts or what the hell lets live on credit .(much easier than spending responsibly).
May 8, 2012 2:33PM
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Well now? Who exactly is responsible for these deficits, and who is going to destroy our country from within? Take a guess.
May 8, 2012 5:13PM
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IDK & ME,

What's all this "we" stuff? I don't remember asking or voting for any representatives to drive this nation off of a fiscal cliff. I never asked to be a slave to any politician or central bankers. I never voted myself anything from the "public trust."

All I've ever asked is that the government leave me alone. Funny thing is, this year they said I didn't pay enough in taxes - that I owed another few hundred dollars more than they had already confiscated. I chose not to pay more. If they wouldn't leave me alone before, let's see what they'll do now. 
May 1, 2012 3:51PM
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This is nothing new, so why do we do nothing?

Why do we not impose higher tariffs against China...a country devastating our job markets with cheap labor and products..a country we have developed a huge trade deficit with....a country we then borrow money from?

So many of the problems stem from this one issue. The weak dollar, the price of commodities, the joblessness.....

Government needs to stop....errr...be less corrupt and stupid and get some tariff's going to balance trade. Recovery will follow.

May 8, 2012 10:54AM
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Get yours if you can, cause I'm gonna get mine.

 

 

- The 1%

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