By 2013, the total U.S. federal debt will total 76% of GDP if Congress remains gridlocked, and digging out at that point will be unimaginably painful.
This photo was taken in February. It's gotten worse since.
In this week's elections, voters clearly voiced their frustration with the explosion in government spending, deficits and debt. Americans recognize that when the outgoing dollars exceed those coming in by 63%––the actual number in the fiscal 2010 budget––it's the same reckless behavior as if they paid for rent and groceries by running up gigantic credit card bills certain to destroy them in the future.
Yet it's highly possible, even probable, that Congress and the White House will succumb to gridlock and do nothing in the next two years to narrow the gigantic gap between outlays and revenues.
That's a formula for disaster. The numbers are so dangerous that President Obama and the new Congress need to act immediately and decisively, for two compelling reasons. First, delaying a budget overhaul for a couple of years would allow our already lofty debt to rise to perilously high levels. Chopping the extra borrowings that would accumulate during the do-nothing period back to today's totals would require either tax increases or spending cuts far more painful than the already wrenching adjustments required today.
Second, the failure to confront the debt problem right now greatly raises the risk of a fiscal crisis that would make borrowing far more expensive for the U.S. government. The sharp increase in interest payments would deepen the budget hole, forcing an era of austerity, led by reductions in benefits, that's virtually unimaginable today. "If we don't take immediate action, we're facing a super sub-prime debt problem with dramatic effects on interest rates and the value of the dollar," warns David Walker, chief of the Peter G. Peterson Foundation, a think-tank that specializes in budget issues. "We risk losing control of our destiny."
Put simply, America can't afford to do nothing.
Today, neither the Republicans, the Democrats, nor the White House has presented a credible plan for closing the budget gap. So far, President Obama proposes freezing discretionary, non-defense spending at 2010 levels. Walker isn't impressed: "The administration has increased those expenditures over 20% in the past two years. Freezing an increase is not a cut."
As for the Republicans, their leaders, including future House Speaker John Boehner, talk in general terms about reforming entitlements, but say nothing specific about how they'd deliver on their pledge to substantially lower future spending for Social Security and Medicare.
Digging a big hole even deeper
What would happen to U.S. debt levels if fiscal policy simply stays on its current course for the next two to three years? Today, the federal debt held by the public totals around $9 trillion, or 62% of GDP, versus $5.8 trillion in 2008. In an August report "The Budget and Economic Outlook: An Update," the Congressional Budget Office provided data that projects deficits over the next several years. The most realistic numbers, as the CBO acknowledges, forecast that the Bush tax cuts will be extended for all but high earners, and that the Alternative Minimum Tax will be indexed for inflation, as invariably happens each year.
Using those numbers, the CBO projects that deficits will total $3.5 trillion between fiscal 2011 and 2013. That would raise total borrowings by 39% and swell debt to GDP to around 76%., bringing America into the danger zone. At that point, interest on the federal debt would absorb one dollar in every ten of spending, versus one in 20 today.
America would then face one of two outcomes, both of them reminiscent of what Ireland, Greece and Argentina have suffered in the last several years. First, let's imagine that we're able to keep borrowing, albeit at somewhat higher rates as huge government borrowing compete with corporations for the small U.S. pool of savings. What must America do today to prevent debt from climbing even higher as a share of national income? According to the CBO, Congress would need to reduce spending by 5% of GDP, or raise taxes by the same amount, or concoct some combination of the two to reach the same number. So even today, the U.S. must either lower spending by 21.5%, or $730 billion a year, or raise income taxes by over 80% in order to prevent future interest payments from swamping tomorrow's budgets.
But now, let's say Washington does nothing until after the 2012 elections. Walker reckons that prudent budgeting requires the U.S. to hold debt at around 60% of GDP. Congress and the president would need to do two things: cut spending or raise taxes by 5 percentage points (by 2013 that will be around $800 billion) and also eliminate the $3.5 trillion in additional debt that piled up from 2011 to 2013. Shedding that extra burden over 7 years would cost around $570 billion a year––think of paying off a 7-year mortgage with fixed payments. Hence, the total burden would be $1.3 trillion instead of today's $730 billion. That's the cost of doing nothing.
Paying the price for higher rates
It could be far worse if a fiscal crisis intervenes. Even without one, the heavy borrowing will push up rates beyond today's projections. "You'd get to 76% of GDP before the full gale winds of Medicare and Social Security arrive," says J.D. Foster, an economist at the conservative Heritage Foundation, and a former budget official in the George W. Bush administration. "The CBO estimates that rates will go back to average by around then, from 2.5% on 10 year Treasuries to 5.5%. But the deficits will push them far higher."
If the foreign investors who hold 40% of our debt lose confidence in our ability to pay, rates could leap even more, wrecking all of today's budget assumptions. For example, if Treasuries jump by 4 percentage points by 2015, America would be paying $1 trillion a year in interest alone, one dollar in four of all spending.
So what's likely to happen if a fiscal crisis arrives, and finally forces Congress and the White House to act? The importance of the election can't be overstated. Overnight, the political dynamic, and the likely outcome of a crisis, has dramatically shifted. When the Democrats held large majorities in both houses of Congress, the most likely solution to a scenario where foreign investors shunned our debt was a value-added tax, enacted the only way it could be: to forestall disaster in the heat of a crisis. The VAT is the revenue source that supports heavy government expenditures, and frequently even balanced budgets, in Europe.
But the Republicans are vehemently opposed to a VAT even in the direst circumstances. Hence, they will fight hard to balance the budget almost exclusively with spending cuts. As I stated, those cuts today would need total 5% of GDP or around one-fifth of current outlays. But with a do-nothing Congress, fiddling while debt rises by another $3.5 trillion, the required reductions jump from $730 billion to $1.3 trillion. That figure represents an incredible one-third of all outlays in 2013.
These numbers are growing so fast that the only time to tackle them is now. Let's hope that the politicians are as alarmed as the families who make the sacrifices to balance their own budgets every month, and whose kids and grandkids could work in a far less prosperous America.
See also:
Paul Ryan's big plans for a small budget
Fed steers clear of shock and awe
Parsing the Republican economic agenda
don't worry. china-india-japan will pay us debt for us to stay afloat.
There aren't any politicians in DC that have the guts to tighten the belt like we need to do. I'm afriad things are going to get much much worse before they get better...
Stop 2 wars we cannot afford to begin with.
Is our government asleep at the wheel? Regardless of party affiliation, we need to strat making some hard choices. Stop the partisan b-llsh-t ang get going on meaningful dialogue and action that rectifies this potentially horrific event that is front and center. This financial issue will make the Great Depression look like a rounding error. Get off your political high-horses and start doing what we elected you do --- represent the American people!!!
Time to clip the wings of the golden goose - defense spending. Why do we still pay about ten times more on our defense than the next, western, industrialized nation (Japan, I believe). How many more high-tech toys of mass destruction do we need and why continue with unwinable wars in foreign and far away oil nations?
Same old same old. We will face more of the same unless "our leaders" learn the road compromise. All we hear is blah, blah,blah, blah ad nauseum about how bad the other person is rather than, Have I got a plan for this country. They are like vultures waiting for their pray to weaken or make a mistake. I am very disallusioned with the constant bickering.
"Americans recognize that when the outgoing dollars exceed those coming in by 63%––the actual number in the fiscal 2010 budget––it's the same reckless behavior as if they paid for rent and groceries by running up gigantic credit card bills certain to destroy them in the future."
If Americans "realize" this, they have been taken in by complete nonsense. This is pure propaganda, because anyone familiar with a business balance sheet knows that investments are not the same as expenses.
Most people spend a lot more than 63% of their income when they buy a home. That was true even before the bubble. The question is not how much was you spen, but what you buy with it. This kind of story is just blowing smoke for someone's political agenda because they know they will lose if the discussion focuses on the relative value of government investments, rather than the costs.
I remember when my share of the national debt was about $30,000. It wasn't that long ago...
"Today, the federal debt held by the public totals around $9 trillion, or 62% of GDP, versus $5.8 trillion in 2008".
I think the more important question is why this article doesn't discuss the above statement. And why does this article conveniently mentions the "Bush" tax cuts, but doesn't mention that the Obama administration and a Democratic controlled congress added this amount to the deficit. Now you want to put the onus on the Repulicans to fix it. That makes you a hypocrite. And why is this the American public's problem now, when we did not approve of any of the spending in the first place?
If we are in such a dire economical situation why is Obama talking about and why does he intend to print 600 billion to raise the debt further. That is almost as much as previous 750 billion stimulus package that did nothing but put us further in debt. I guess I just don't understand economics. It seems ridiculous to me. I know it is supposed to lower interest rates so people will buy more stuff and refinance their mortgages and buy houses. But mortgage rates were already low, with chances to refinance, and people are being responsible and not wanting to borrow money they feel they can't repay. So why is the federal government trying to coax them to spend anyway. That was part of what started the whole economic crisis in the first place. Making banks loan to people to buy houses, that the banks wouldn't have otherwise, because the people didn't have enough money to afford a house. What am I missing
We are spending almost a billion dollars to build new embassies in Afghanistan over the next 3 years. I bet there are hundreds of these types of wasteful spending sprees that could be wiped off the books before cutting social security that we have already paid into.
Tough times call for tough actions. Unfortunately we are at a point where teh public wants something done as long as it does not impact them. Basically let the other guy pay. And the politicians on both side pander to the base. Until everyone individuals and corporations are willing to make a sacrifice nothing will change. Let's face it Benefits such as Social Security and the like need some form of means testing and the income limits for on which one pays Social Security taxes need to be removed. As for the Bush tax cuts instead of an out right expiration, fade them out for all over 2 years. And by all means treat all income ad income regardless of the source. Let those that make their living through dividends and other investment income pay thier fair share. Just because the may not work 9 to 5 or run a hedgefund does not entitle then to paying lower income taxes. Afterall isn't that their "income". It's time for us all to buck up and stop blaming everyone else and expecting the other guy to pay and not us. It can no longer be about me, myself and I, but rather about us as a society.
The GOP will stick its collective head in the sand and try to borrow more from China rather than doing the right thing which would be to start paying for the excesses of the Bush era.
Democrats may be the tax and spend party, but the Republicans are the borrow and spend party.
Republicans should never be allowed to use the words fiscal responsibility again.
There are no IFs, there is only WHEN.
This country is screwed. It is already bankrupt and the Fed is destroying the dollar.
The 76% debt-to-GDP figure at the start of this article only counts the publicly-held debt, i.e.., US Treasuries. The gross national debt that includes loans from the Social Security trust fund (which WILL need its money back) boosts that figure by as much as 50%. The National Debt Clock counts the gross, and debt-to-GDP will go over 100% next year if not this year.
Screen name (Select one with 3-12 characters; Numbers and letters only)
Enter your e-mail address below and we will send you an e-mail with a link and code to reset your password.
Already have the reset code?
Reset code
Read Full Article »