Monday, January 17, 2011

Debt Ceiling Dilemma

A Reuters poll raises some hope that there is popular political support to start addressing the country's fiscal disaster.  71% of adults indicate that they are opposed to further increases in the statutory borrowing cap. Only 18% support an increase in the debt limit.  The current debt ceiling is projected to be reached sometime this Spring. (See my previous post I Will See Your $14.294 Trillion and Raise You...)

Unfortunately, by almost equal margins in the same poll, the public does not want to cut the entitlements that represent the largest costs in the federal budget-Social Security and Medicare.  A poll by CBS News conducted last week also confirms that 77% of Americans prefer to cut spending and just 9% call for raising taxes.  An additional 9% think we should do both.  Is there any way to get what the public wants?

Let's look at the projected numbers for the current 2011 fiscal year by major categories. Bear in mind, if the debt ceiling is not increased, $1.3 trillion would have to be cut from the budget at some point.  We also would have to continue to pay all interest on the federal debt or be in default on that debt.  For simplicity, I have rounded all numbers to the nearest $1 billion.  Chump change these days!

Total Revenues                                $2.6 Trillion
Total Expenditures                           $3.9 Trillion

Projected Deficit                              $1.3 Trillion

Cannot Be Cut
Interest                                                .3 Trillion

Public Says Don't Cut
Pensions (Fed & SS)                          .8 Trillion   (Only 20% Support SS Cuts in Reuters Poll)
Health (Medicare etc)                         .9 Trillion   (67% Opposed in CBS Poll)
Education                                           .1 Trillion   (67% Opposed in CBS Poll)
Law Enforcement                               .1 Trillion   (Only 21% Support Cuts in Reuters Poll)

Public Open To Some Cuts
Defense                                              .9 Trillion
Welfare                                              .5 Trillion
Transportation                                    .1 Trillion
General Government                           ****         ($29 billion)
All Other                                            .2 Trillion

Therefore, to cut the necessary $1.3 billion to avoid further increases in the debt limit (and to spare entitlements, education and law enforcement) would require that the entire defense department be eliminated as well as 50% of all other federal spending (welfare, unemployment, transportation, farm subsidies, and all other government operations that you can think of-for example, everyone on the federal payroll, national parks etc).

The Treasury Department may be able to play some games for a while if a deal is not made before the debt limit is reached.  However, these numbers show that there is absolutely no way that this country can pay its bills over the foreseeable future without raising the debt limit. A deal will have to be reached.  It is just a question of what is in the deal.

I know some argue that the bargaining chip should be healthcare reform.  That would be a big mistake.  I favor repeal of the health care bill in order to develop a better alternative.  However, that effort needs to stand on its own. Tying repeal of health care to the debt limit will be seen as politics as usual by the public.  It will undermine the public backing that is already present to tackle the debt issue.

The Republicans have the high ground.  The debt ceiling limit increase should be tied to long term budget reforms that set hard future budget targets.  We need a reasonable glide path that brings the spending excess down in steps. Perhaps this is also the opportunity to tie passage of the debt limit with Congressional approval of a Balanced Budget Amendment and/or Federal Spending Limitation to the Constitution.  

How should the budget targets work?  One suggestion might be to make the spending cuts the Republicans talked about in the Fall campaign as the starting point.  Budget targets are then established for the next 5 years to bring the budget into balance by the end of that period.  This provides the opportunity for a recovery in the economy to lessen some of the pain.  However, if cuts are needed, the budget deal I am recommending would require across the board cuts on everything except interest on the debt.  Is this hatchet job the best way to do this? No.  But having this trigger mechansim out there is the only way to get something done.  Congress has proven over and over that they only will act if they have no other choice.  If Congress has a better way to do it when the target date is reached, they can pass alternative legislation that gets the same overall result to avoid the across the board cuts that are scheduled.

What does this mean in real terms?  The projected deficit for this year is about 8% of GDP. That means we would have to reduce the deficit by about 1.5% of GDP each year for 5 years.  The last OMB projection I could find indicates that half the deficit is projected to come down based on their assumptions on economic recovery over this period.  That means we need cuts of about 4% of GDP.  Projected GDP for 2011 is a little over $15 trillion.  Therefore, we would need about $600 billion in cuts in today's dollars under this plan over the next 5 years.

How would you do it? Get out your scalpel!

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