The Fiscal Conversation Must Change For America To Change

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Prepare for the political hyperbole to reach ramming speeds as we approach yet another fiscal policy "showdown". Using trillion dollar platinum coins to force Republicans to raise the debt ceiling is already a daily story on cable news. Whether the $1.2 trillion sequester should be changed by March 1 to have fewer defense cuts or no cuts at all will be hotly debated on Twitter. And Vegas is likely to set a betting line on whether Congress can pass another continuing resolution by late March.

Frustratingly, these discussions are just repetitions of the script we've been reading ad nauseum over the past few years.

Like the last few fiscal harbingers of doom, the March 1 deadline for raising the debt ceiling and addressing sequestration is pulling public discourse towards a manufactured crisis. Instead of talking about real solutions to Washington's spending addiction and mounting debt, all politicians want to do is win the rhetorical politics of the moment.

This has been the case for years now, with the solution to one fiscal "showdown" just leading to another crisis months later. Consider that there have been no fewer than half a dozen times when Congress has brought the government to within hours of shutting down as the two parties have wrangled over whether to fund the government with a stopgap "continuing resolution," This is because Congress has not passed a budget since April 2009. And each continuing resolution has just set the stage for yet another manufactured showdown where Congress would ultimately save the day - from themselves.

In fact, a stopgap measure used in September 2012 to fund the government until March 27 is part of the upcoming fiscal "crisis." Similarly, the epic debt ceiling debate in May 2011 set the stage for last month's fiscal cliff debacle.

The sole difference after these manufactured crises are "averted" is rhetorical positioning for the next showdown. Consider that the recent fiscal cliff deal did nothing to address out of control spending or the pending entitlement doom. Even the projected $60 billion revenue for 2013 gained from raising taxes on the wealthy is a pittance relative to the estimated deficit in 2013 of about $1 trillion. A pointless legal plunder of American citizens.

Granted, most of the 2001 and 2003 temporary tax changes were made permanent by the fiscal cliff deal. But that only seems like a big change until you compare it to the continuing total mess of our fractured, anti-growth, pro-cronyism tax code.

Yet, all of the media coverage of the negotiations has sold the American public a narrative that cooler, nobler, more stately heads prevailed; that Congress was able to broker a miracle deal to help the country. Headlines have focused on Boehner's education in navigating partisanship, Obama's evolving negotiating prowess, whether there was enough revenue in the deal, and whether the GOP had lost its soul on taxes.

But all that misses the point. America is deep in debt with a serious spending problem and an entitlement crisis looming on the horizon, and neither party was ever suggesting a serious plan for addressing this.
There is no responsible excuse for Congress's perpetual state of delay. We know from extensive academic review that once government debt-to-GDP ratios get to the 90 or 100 percent levels that the fiscal irresponsibility starts to constrict economic growth in most countries (for some it starts even before). We know that high levels of sovereign debt can mean reduced private investment and weakened productivity. And we know from history that as debt grows higher, so does demand for more taxes to rein in that debt. But this strangles growth even more as money is snatched from the hands of productive households and investors.

What is the state of America in 2013? Gross Domestic Product is about $15.8 trillion, meaning total U.S debt-to-GDP is presently 103 percent. At the same time, businesses are sitting on hundreds of billions in cash, waiting for a more confident business environment. The Federal Reserve continues to keep interest rates low so that borrowing is cheaper, but this is also making it difficult for investors to find good returns. Everything is playing out as the historical data would suggest for a high debt ridden country experiencing constricted economic growth.

Since there is also a lot of private debt in the economy that needs to deleverage and the housing and labor markets are still weak, it is nearly impossible for America to grow its way out of this debt mess. The only option is to cut federal spending; and for the long-term, that means cutting entitlements.

This is perhaps a harsh reality, but instead of dealing with the challenge as mature adults, politicians and the media have decided to dwell in a cesspool of hyperbolic rhetoric full of hypocrisy and misleading terminology.

For example, consider the $1.2 trillion in spending cuts (sequestration) that were delayed until March 1 to avoid going over a fiscal cliff. It turns out that sequestration is neither really a cut in spending nor even a bad thing. In exchange for raising the debt ceiling in 2011, Congress agreed to $1.2 trillion in cuts...but the "cuts" were just a slight reduction in the projected increase in federal spending over the next ten years. Yet, to hear the media or many on Capitol Hill tell it, this would destroy the U.S. economy and tear apart the fabric of federal institutions.

Perhaps what is more incredible is that sequestration is even being considered a political chip on the table for the March 1 debt ceiling discussion. These cuts were the trade-off for increasing the federal borrowing rate during the last debt ceiling negotiation. If they get renegotiated here then the real outcome of the 2011 showdown was a lot of bluster for just simply raising the debt ceiling. If there is going to be another deal it should include reductions in the growth of federal spending on top of the currently scheduled sequestration cuts.

Including the sequester in the next round of faux-fiscal policy negotiations only makes sense in light of a public discourse that thinks we really are cutting spending and that this is bad for the economy.

What happens when we inject a little perspective into the debate? Assume for a moment that the right level of government spending is what Washington was allocating to federal budgets in 2002. This was before the defense budget ballooned under two wars, but when nearly every other federal program we have today was well funded. If Congress had frozen all spending at 2002 levels and just increased outlays to adjust for inflation and population growth, then the federal budget would have been $2.2 trillion in 2012 - 41 percent less than we actually spent last year. So theoretically we could cut that much from last year's federal spending and have a world similar to 2002. Not exactly social Darwinism.

As long as Republicans talk about spending being bad for the economy while favoring tax loophole cronyism that gives government handouts just the same, we aren't having the spending discussion we need to have.

As long as Democrats demand the rich pay their fair share, without defining what "fair" is beyond just the abstract notion of more, we aren't having the tax reform discussion we need.

As long as both parties treat proposals to substantially reform entitlements in the near-term like war crimes, we won't get the fiscal responsibility we need.

Ultimately, our fiscal debate can't just be rhetoric about the manufactured political crisis of the moment. Focusing on the debt ceiling and sequestration is to get mired down in more pointless discussion. America's fiscal woes are much bigger than this.

Anthony Randazzo is the Director of Economic Research at the Reason Foundation. He can be reached at anthony.randazzo@reason.org

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