Solving the Debt Crisis

John McClaughry 

John McClaughry

The United States government and its AAA bond rating are heading toward a crisis on August 3, and citizens ought to understand how we got to this sorry situation.

According to the Congressional Budget Office alternative fiscal scenario, widely considered the most realistic, Federal debt now held by the public is 68% of gross domestic product. On the present trajectory, it will reach 100% of GDP by 2021, well into the crisis zone.

The national debt – exclusive of the more than $50 trillion in long run unfunded liabilities of Social Security and Medicare – will hit $14.3 trillion next month. At that point the Treasury cannot issue more debt to finance more federal spending. Raising that limit requires an act of Congress.

This year the federal government will raise about 60% of its spending from taxes collected from the American people. It will borrow the remaining forty percent. About half of that will be borrowed from foreigners, notably the Chinese. Those borrowers are already spooked by the relentlessly approaching U.S fiscal crisis.

Last year Social Security paid out more than it took in from payroll taxes. It covered the shortfall by cashing in special bonds bought from the Treasury with surpluses accumulated in past decades. That portfolio will keep Social Security paying benefits until 2038. Every time the program cashes in a Treasury bond, however, the Treasury has to raise the funds by diverting money from other programs, or issuing new debt.

Medicare is far closer to insolvency. It is eating through its reserves at the rate of $37 billion a year, and will run out of money in 2024, five years earlier than predicted just a year ago.

Meanwhile, the federal deficit spending for the past three fiscal years (one of Bush’s, two of Obama’s) has totaled $4.3 trillion, which increased the national debt by 40%.

The growing fiscal crisis is the predictable result of decades of fiscal irresponsibility, enthusiastically practiced by politicians of both parties. Raising taxes to cover desired spending is politically dangerous. Raising spending – distributing more money to more recipients – builds political support. A cynic would say that this is the reason why democracies cannot last.

In January President Obama offered his budget, featuring trillion dollar deficits for years into the future. The Senate rejected in 97-0. Now the President is promising cuts in domestic spending in return for a large debt limit increase and a sizable amount of new taxes.

The Republican House says it will vote to raise the debt limit by an amount less than the specific spending cuts required, with no net tax increases. It also wants Congressional approval of a Balanced Budget Amendment to the Constitution.

President Obama, a lifelong devotee of expanding government, seems to be at a loss how to deal with Republicans who are unwilling to perpetuate liberal spending programs that they view as excessive, unjustified, wasteful and even destructive.

In what the Christian Science Monitor described as a “primal scream” last Friday, the President portrayed the Republican Congress almost as some kind of cult, unwilling to yield to the imperatives of ever more government spending, taxes, and debt.

If the debt limit is not raised, the Treasury will not default on Treasury debt. There are plenty of tax dollars coming in to pay the interest. Nor will Social Security checks not be written, because Social Security’s redemption of its Treasury bond assets, and the Treasury’s issuance of new debt to cover the repayments, doesn’t increase the national debt.

There would, however, be unpredictable economic consequences, possibly “catastrophic”, possibly temporary. But unless the U.S. shows the world that it can get its fiscal house back in order, Americans will be assured of an ever-deepening economic crisis.

Thanks in large part to the Tea Party demand for fiscal responsibility, the House Republicans are taking responsible, if controversial, steps to prevent the coming national train wreck. President Obama and the Democrats are determined that the only solution is keep jacking up the debt limit, and to pay for their endless list of spending demands by hitting up “the rich” – the people now paying half of federal income tax collections, for ever more tax payments.

The painful House plan will work. The destructive Obama plan will not.

It ‘s time for America to make the difficult choice.


John McClaughry is vice president of the Ethan Allen Institute.