NATCHITOCHES, La., August 4, 2011 — The debt ceiling had to be raised, but with the debt deal, Congress and the President solved nothing. They might have delayed America’s day of reckoning; they may have made it inevitable.
Congress agreed to cut spending over the next ten years by about $2.5 trillion. That means that spending will rise, just not as much as was forecast. Those cuts are from baseline forecasts, which include regular annual spending increases.
To put that in better perspective, the Congressional Budget Office last year forecast total deficits over the next ten years of about $6 trillion. The great debt-ceiling deal would, if followed scrupulously by all parties (you’re excused if you want to laugh), allow the debt to grow by $3.5 trillion.
We won’t make a dent in the national debt with this kind of budget cutting.
The pessimistic view is that United States is doomed eventually to default. If not now, then in 20 or 30 years. That seems a long time off, but most of us plan to be alive and retired then. We may have jobs as greeters at Wal Mart to look forward to in our retirement.
We don’t have a chance to retire a penny of the debt through budget cuts. That doesn’t mean the debt can’t be retired. The optimistic view is that we can grow out of deficits and debt.
Towards the end of the Bush Administration, deficits were falling. They weren’t falling because Bush and Congress were cutting budgets, nor was it because Congress passed tax hikes. They fell because the economy grew, and when the economy grows, so do tax receipts.
Deficits exploded for two reasons: the recession, and an explosion of government spending. Even without spending growth, deficits would have grown. If the economy started growing at a healthy pace, the tide of red ink could be reversed. Creating jobs and stimulating economic growth will reduce deficits and eventually debt.
Washington has been obsessed with cutting deficits through taxes and spending. It’s ignored the option of economic growth. Why? Probably for the same reason that it’s ignored job creation, which is just the other side of that coin: It doesn’t have a clue how to begin. In the partisan warfare over the debt ceiling, spending and taxes, job creation and economic growth have been peripheral issues.
The argument that cutting the deficit will spur economic growth has little historical data to justify it. Causality is in the other direction. Even economists who think the debt is the biggest challenge facing us generally agree: Cutting the deficit will reduce economic growth in the short run by as much as 0.5%. That means a decrease in tax revenues from baseline and a larger deficit. It also means more unemployment.
Balanced budgets are a virtue in times of economic growth. They create confidence in the economy and in our money. That promotes greater investment, more economic growth, more tax revenues, and even more fiscal virtue. When the economy is growing, taxes can be cut without putting budgets into deficit, or money can be put into pension funds and used to pay down debt.
Can, can, can. In times of economic growth, we’ve done none of that. We’ve pushed up spending and cut taxes, putting ourselves further into debt. We’ve put little or nothing into retirement funds, done nothing to bring down health care costs, and so put ourselves in a $61 trillion hole. How much will the economy have to grow to get us out of that one?
Balanced budgets aren’t such a virtue in recessionary times, but we’re in a terrible bind. We already have so much debt and so much more crashing our way that adding to it wrecks confidence in our future. Without confidence, our currency is waste paper and our economy is Greek.
Some argue that the debt-ceiling debate wasn’t a fiasco. It was a mature, responsible discussion that was long over due. Most people who take that position are currently (and let us hope very temporarily) employed as senators and representatives. They’re absolutely wrong. The debate was a complete fiasco, and it was destructive.
The economy depends on public confidence, at home and abroad. It’s only as strong as everyone believes it is. Congress and the President managed to convince most of the world that our government deserves no confidence at all. They managed to convince the world that we’re incapable of dealing with our fiscal problems in a reasonable and adult way. The debt-ceiling debate was a fiasco because so many in Washington worked so long and hard to convince the world that it was a fiasco.
It’s essential that Washington begin talking up the economy, and putting some actions behind the talk. If they want to create jobs and promote growth, they have to convince business that that’s what they want. They have to convince the world that America is serious about fixing its problems.
Fixing the tax code would be a start. Get rid of loopholes, eliminate exemptions and subsidies, cut tax rates and then see what happens. Our regulatory regime has to change. Leave health, safety and environmental protections in place (do you really trust BP to have the safety of local water supplies as their top priority? Really and truly, do you?), but why do we make it so difficult for new businesses to form?
Phony bipartisanship has got to go. Bipartisanship isn’t about the parties agreeing. Heaven forbid that they should agree on much. We don’t need the Democrats and GOP acting in concert like a political cartel. What we need is mature disagreement and an end to name calling. Referring to your colleagues as “terrorists” isn’t in the spirit of bipartisan civility.
There’s nothing wrong with our economy and our political system that can’t be fixed with mature, responsible discussion and some simplification of tax and regulatory codes. That’s why I’m a pessimist. We’re doomed.
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