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On Debt Ceiling, Obama’s Offer Is Business as Usual



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The main message from the president’s debt-ceiling press conference yesterday was that Congress must give the administration more borrowing authority without any strings attached. In other words, the president wants business as usual to prevail in Washington. That’s unfortunate because here is where business as usual has taken us so far:

  • $16.4 trillion in debt. The government has borrowed over $2 trillion since we had this debate last in the summer of 2011.
     
  • The government is not only addicted to spending, it is also addicted to borrowing. For every dollar it spends, it borrows 40 cents. Every month it spends $100 billion more than it collects in tax revenue. That’s over $1 trillion a year in deficits. 
     
  • Government spending as a share of GDP is high: 23.5 percent in 2012. We are far from the 18.2 percent of the end of the Clinton terms.
     
  • Spending on mandatory programs such as Social Security, Medicare, and Medicaid consumed 31 percent of the budget in 1970. Today they consume 58 percent of the budget.  
     
  • Without significant spending reforms, the interest we pay on our debt alone will consume 35 percent of our budget by 2040, up from 6 percent today.
     
  • Congress and the administration — whether Republican or Democrat — regularly make promises to voters without any idea of how they will pay for them. A recent estimate shows that the total long-term imbalance of Social Security and Medicare’s Parts A, B and D alone is $66 trillion, and restoring them to sustainability will require almost doubling the payroll-tax rate (something no one wants to do). Yet, Washington added another enormous federal entitlement in March 2010 with Obamacare. 
     
  • Without leverage and without a crisis in sight, Congress never cuts spending; note it hasn’t even bothered to pass a budget in years.

The chart below is updated from one the Peter G. Peterson Foundation published in their 2010 “Spending Primer.” It’s a good illustration of what business as usual will mean for Americans: Without reforms to Social Security, Medicare, and Medicaid, and without a way to slow down the spending consumed by these programs, the government will continue to spend significantly more money than it collects. It will continue to borrow — probably at an increasing rate — and all spending other than on interest payments and mandatory programs will be squeezed out.#more#  

 

It is a sign of how dysfunctional Washington has become that it takes a crisis such as the country hitting the debt limit yet again to force a conversation about how to put us on a sustainable fiscal path. It is also a sign of how deep Washington’s addiction to spending and borrowing has become that outside of these crises, Congress forgets about fiscal discipline altogether. The attempts by Republicans and Democrats alike to avoid the implementation of sequestration cuts is a good example of this.  

Now, there is no doubt that the debt ceiling must be raised. Also defaulting is not an option (read Kevin Williamson’s piece about how defaulting doesn’t mean not paying all of our bills). But while it is not ideal to use a crisis to demand that the president and Congress acknowledge that the path we are on is unsustainable, it beats continuing business as usual. 

By the way, Fitch seems to expect the U.S. government to have a serious conversation about its addiction to borrowing. This morning, the rating agency announced both that the country will suffer a downgrade if it doesn’t pay all of its bill and that it may also suffer a downgrade if lawmakers raise the debt limit without attempting to lighten our debt problems. Here is the Wall Street Journal on the announcement:

Fitch said Tuesday that it may downgrade the nation’s debt even if lawmakers raise the debt ceiling, if Washington emerges from those negotiations without taking steps to lighten the U.S. debt load.

Fitch, owned by Fimalac SA and Hearst Corp., currently assigns U.S. debt its highest rating of triple-A. But that rating has a negative outlook, meaning a downgrade is more likely than if the outlook were stable.

“In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current negative outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted,” Fitch analysts said in Tuesday’s report.



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