By George Noga
Most readers, even highly numerate ones, have profound difficulty coming to terms with the debt crisis – which really is a misnomer; it should be called the “spending” crisis. I therefore have selected 10 truths (using a minimum of numbers) readers may count on as being 100% accurate. The following truths are bedrock facts you can put in the bank and never doubt.
“At bottom, the crisis is not economic; it is moral.”
1. The debt limit bill signed August 2, 2011 is all sound and fury signifying nothing. The Washington reality, including for many of conservative bent, is the bill was successful because it: (1) changed terms of the debate; (2) was the best deal obtainable; (3) contained no tax increases; (4) avoided downgrade and default; and (5) cut spending by $2.5 trillion.The real world is diametrically opposite because: (1) nothing actually was cut from current spending levels; (2) so-called “cuts” in this fiscal year were $4 trillion – equal to one day’s borrowing; (3) no one can bind future presidents and congresses to honor the deal; (4) spending increases $6 trillion over 10 years; (5) it didn’t avoid downgrade; and (6) the cuts already have disappeared. Slower economic growth this year (vs. budget) increased the deficit $1 trill ion. Slower growth in 2012 will increase the deficit by at least another trillion. The deficit is the same now as before the August 2nd bill; the entire $2.5 trillion of alleged cuts was offset by slower economic growth. Bottom line: the bill meant absolutely nothing.
2. At bottom, the crisis is not economic; it is moral. It is about who we are as a people and what kind of country we leave to our children. It is about protecting our liberty. Our economy is the greatest source of our national security (ask Gorbachev) and we are placing it at grave peril.
3. A short term solution is not possible; it will take a decade and likely more. There are no one-shot solutions or magic bullets. (See #4 infra.) Perpetual vigilance, engagement and commitment are required. We must win at least the next 5 election cycles. Our adversaries will never give up; we can’t either. We must remain involved for life.
4. A Balanced Budget Amendment (“BBA”) is not an answer. As I wrote last time, there are myriad paths through, over, under and around a BBA. We expend enormous energy attempting ratification with no guarantee of success. If we succeed, it could lull us into complacency believing we have solved the problem once and for all. We break off engagement but our adversaries don’t. They eviscerate a BBA and we have expended great moral capital and energy for a hollow, transient accomplishment.
5. The problem is far, far worse than most anyone understands. If GDP grows at our historic average vs. projections, the deficit is $4 trillion higher over the next 10 years. If interest rates are the average of the last 20 years vs. budget projections, the deficit is $5 trillion worse. The budget assumes the Bush tax cuts are repealed entirely; if instead they are reinstated for those earning under $250,000, the deficit soars another $3 trillion. These factors alone mean the deficit easily could be $12 trillion worse than projected and there are many more problems other than the three identified herein.
6. The real US debt limit is not up to Congress; it is up to the market. In the end Congress is totally irrelevant; the debt limit is up to the market – people like you and me making our decisions independently. The market already is beginning to speak.
“If the orgy of spending slows GDP 2% per year, we are poorer by 64% in one generation, 270% in two generations and 442% in three generations.”
7. The debt crisis devastates the underclass – in whose name the spending is being done. The orgy of spending is being justified as helping the less fortunate among us; actually that’s misdirection; it’s really about vote buying and imposing European socialism. With just 1% per year lower economic growth for one generation (25 years) everyone is poorer by 30%; in two generations 65%; and in three generations 210%. If our current course slows economic growth by 2% per year, the poor will suffer by 64%, 270% and 442% respectively in one, two and three generations. The less fortunate suffer far more from slower economic growth than from any gain they ever could hope to realize from the current spending Bacchanalia.
8. Great pain is inevitable no matter what happens. If we raise taxes it will be necessary to tax every tax-paying household an added $10,000 per year merely to stabilize the Debt/GDP ratio at its current level; this will bring catastrophe. Cutting spending permanently by a like amount will also cause grief. Even the most gentle solution imaginable (cutting spending and increasing economic growth) will create hardship and test our social cohesion
9. A crisis appears unavoidable and may already have started. If something cannot go on forever, it won’t. The earliest things can change is 2013 and then the new president (maybe) and congress can only impact spending for the FY ending September 2014. That is too late to avert a crisis. Make no mistake; by a “crisis” I mean the worse experience of our lifetime.
10. The federal government “Fiscal Gap” is $300 trillion, half a quadrillion for all government! The CBO has computed the net present value of all future federal government revenues and expenses and determined the deficit is $211 trillion; this innocuously is called the fiscal gap. However, it is based on fantasy-land numbers; the true fiscal gap is likely north of $300 trillion. Throw in state and local governments, of which there are nearly 50,000, and the total fiscal gap for all governments in the USA could be $500 trillion – that’s half a quadrillion!
“The greatest train wreck of all time is unfolding
in slow motion right before our eyes.”
Folks, the greatest train wreck of all time is unfolding in slow motion right before our eyes. Everyone can see it coming except for a few people in la-la land who hope there still may be time to avert disaster. However, the president of the railroad denies the trains are on a collision course and orders the engineers to stay on course and to lay on even more steam. And the band plays on!
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