Two weeks ago, Standard and Poor’s kept the U.S. government’s AAA debt rating, but downgraded its future outlook from “stable” to “negative.” The announcement roiled stock markets and underscored the need for tea party activists to keep legislators’ feet to the fire on the debt ceiling. Paul Ryan’s allegedly radical proposal, unfortunately, doesn’t address the looming fiscal crisis.
In explaining their negative outlook on Uncle Sam’s debt rating, S&P said: “The U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us.” Although refreshingly candid, the statement is actually far too tepid. Americans who merely follow the standard press accounts of the current budget negotiations in Washington have no idea how serious the fiscal situation is.
For example, President Barack Obama and congressional Republicans recently hailed their compromise deal that allegedly slashed $38 billion from this fiscal year’s spending. Yet after the backslapping died down, the Congressional Budget Office estimated the actual savings would be closer to $352 million (with an “m”).
More generally, Americans have been offered a choice between the allegedly savage budget cuts of the Paul Ryan proposal versus the more modest spending cuts coupled with tax hikes proposed by the Obama administration. The underlying premise is the Ryan plan is perhaps biased in favor of the rich, but it at least would get the deficit under control. This, too, is a myth.
Even using the Ryan plan’s own numbers, it doesn’t expect to actually balance the federal budget until 2038. In other words, even if everything goes exactly according to plan, the Ryan budget would have the federal government continuously run deficit after deficit for almost three decades. In just the first 10 years of its implementation, the Ryan plan calls for adding $5.1 trillion to the federal debt held by the public, an increase of 45 percent. These disturbing numbers are all the more depressing when we consider they are unrealistically optimistic.
For one thing, the simulation underlying the plan’s forecast doesn’t include the possibility that the economy could fall back into a major recession when the Fed is forced to raise interest rates because of inflationary pressures. The Ryan plan also assumes foreign investors will be happy to continue financing Uncle Sam’s deficits, rather than dumping the dollar. If either of these plausible calamities occurs, the U.S. government would be forced to run much higher deficits than Ryan anticipates.
Yet another weakness is that the Ryan approach gives the goodies (reductions in tax rates) upfront, while deferring the politically painful changes to entitlement spending down the road. Why should we expect future Congresses to be more willing to anger senior citizens than current politicians, especially when this demographic is growing in relative size and influence?
Compared to many other political budgets, the Ryan plan is actually impressive in the scale of its proposed cuts. The problem is these cuts will likely never materialize, and even if they did, they don’t go far enough.
There aren’t any magic-bullet solutions to the tremendous fiscal hole into which the U.S. government has dug itself. Spending has risen to astronomical levels because it’s popular; people enjoy getting money from the government. The only path away from crisis is the obvious one: Washington needs to drastically cut spending to its current revenues. It needs to live within its means and stop racking up additional debt.
Tea party activists who put into office alleged budget hawks need to hold their feet to the fire. Rather than raise the debt ceiling on the basis of “promised” future spending cuts, true reformers would keep the debt limit where it is. This need not cause economic calamity or require a default on existing debt obligations, if Congress simply cut spending in other areas. Rather than saddle future legislators with the tough decisions, the current Congress should tackle the crisis now.