When Moody’s, the bond- rating agency, threatened to downgrade the creditworthiness of the U.S. government if the ceiling on the national debt isn’t raised by Aug. 2, the threat was reported on the evening news on CBS and NBC, and on the front pages of many newspapers.
But journalists paid less attention when Moody’s and Standard & Poor’s said they would downgrade U.S. bonds if federal debt isn’t cut by $4 trillion over the next 10 years.
If our credit rating is downgraded, the Treasury Department will have to pay a higher rate of interest to sell its bonds, ballooning the deficit. Americans will have to pay more for home and auto loans, because the interest rates on them is tied to what the Treasury pays.
Raising the debt ceiling would permit the Treasury to borrow more money, thus avoiding default in the short term. But borrowing more makes the risk of default greater in the long run.
The long run isn’t very far off. Last week, Standard & Poor’s said it will downgrade U.S. Treasuries in 90 days if a deal to reduce the debt by $4 trillion isn’t made by then.
Here’s why Standard & Poor’s is worried. In 2001, the national debt was $5.95 trillion. It’s $14.34 trillion now, a 141 percent increase in just 10 years.
When debt exceeds 90 percent of gross domestic product, economic growth is reduced one to two percentage points, economists Kenneth Rogoff and Carmen Reinhart have estimated. A percentage point decline means 1 million fewer jobs, according to the president’s Council of Economic Advisers.
Debt is now about 95 percent of GDP and going higher. The Treasury announced last week the budget deficit for this fiscal year will be larger than last year’s $1.29 trillion.
So you’d think President Obama would be as worried as are the bond rating agencies, but the evidence suggests otherwise.
In January, Mr. Obama presented a budget the Congressional Budget Office estimated would add $9.5 trillion over 10 years to the national debt, which at that time was $13.4 trillion. It was so frivolous, not a single Democrat in the Senate voted for it.
In a speech at George Washington University in April, the President said he’d revised his budget to reduce spending by $4 trillion over 12 years. But he provided no details.
Journalists have reported Mr. Obama’s claim that he offered $1.7 trillion in spending cuts during closed-door negotiations with Republicans, but, again, the President has provided no details.
The President isn’t alone in fiscal delinquency. Senate Democrats haven’t presented a budget in more than two years, even though the law requires the majority party to do so each year.
Last week, House Republicans passed— again — a detailed spending plan to trim nearly $6 trillion from the budget Mr. Obama submitted in January.
The President said he’ll veto the GOP’s “cut, cap, and balance” plan if it gets to his desk. He wants a “more balanced” plan that includes tax increases. Roughly $1.75 trillion in new taxes already are scheduled to kick in in 2013, but Mr. Obama didn’t mention them.
The problem is spending. Outlays rose from $1.863 trillion in 2001 to an estimated $3.819 trillion this fiscal year, 105 percent in 10 years. The federal government now consumes 24 percent of GDP. Since 1903, federal spending has averaged a hair over 20 percent of GDP.
Another way to indicate the problem is spending — specifically, Mr. Obama’s spending. If federal spending were held to what it was during President George W. Bush’s last year in office, deficits likely would be eliminated in four years.
Since World War II, federal tax revenues have averaged 18 percent of GDP. Income tax rates varied widely during this period, and there were both booms and busts. But tax revenues never exceeded 20.6 percent of GDP. That seems to be a ceiling — no matter what economic conditions are or how high rates are raised — and it suggests the budget cannot be balanced unless spending is held below 20 percent of GDP.
So tax hikes can’t close the budget gap. But they could clobber the moribund recovery, making the deficit worse.
Democrats want Republicans to accept real tax hikes in exchange for mostly phantom spending cuts. Because they are unwilling to do so, Republicans are being described by many journalists as “intransigent.” But the truly intransigent are those who want to go on spending as if there were no problem.
Jack Kelly is a columnist for The Blade and the Pittsburgh Post-Gazette.
Contact him at: email@example.com