Why the Debt Crisis is Here to Stay

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On Thursday, the Senate passed a 90-day suspension of the debt ceiling, postponing the looming debt crisis for three months until a deal can be worked out.

That's the theory, at least.

In fact, most experts, if they are being honest, agree that, unless major changes are made to both taxation and spending, budget crises will be a permanent feature of American life and politics.

It now looks as if the federal government is going to muddle its way into a situation where sequestration, once a dreaded threat to be avoided at all costs, now looks like the only way to implement across-the-board budget cuts.

Sequestration takes an axe to the entire budget thereby avoiding responsibility for any unpleasant outcomes resulting from the spending cuts. It's not the smartest way to cut spending but is one of ways to do it without making difficult choices.

The Looming U.S. Debt Crisis

The passage of the American Taxpayer Relief Act (ATRA), which permanently extended the Bush era tax cuts for all but the highest income taxpayers, has now put the United States on the path of having its national debt grow to double the estimated gross domestic product (GDP) by 2040.

According to a study based on Congressional Budget Office (CBO) projections by the Peter G. Peterson Foundation, even raising income taxes on the wealthiest Americans and allowing for the impact of sequestration on spending merely postpones the day when America owes 200% of its GDP by a few years.

In fact, a report by the CBO shows that, had the Bush tax cuts not been extended, the debt would have fallen to between 60% and 70% of GDP, a sustainable level.

According to the CBO, we are now in a situation where, if nothing is done, tax revenue will remain at 18% of GDP for the indefinite future while non-interest spending would rise from about 22% of GDP today to about 26% of GDP by 2037.

Most of this increase comes from the growth in healthcare spending, for Medicare, Medicaid and other programs related to Obamacare, from 5.6% of GDP in 2011 to 9.6% of GDP in 2037. Social Security spending also rises but only marginally in GDP terms.

Unless major changes are made either to healthcare spending or to healthcare costs, America's rising medical expenses will place ever increasing pressure on the rest of the federal budget.

Battles over how to allocate a shrinking slice of the budget pie to other uses will roil Congress for the indefinite future.

If the past is any guide, dysfunction will be the order of the day. Today's hard choices are going to look easy by comparison.

How to Fix the U.S. Debt Crisis

You don't have to be a rocket scientist to figure out that the federal government needs to both raise revenue and cut spending to bring the deficit back to a sustainable level.

Congress seems to be willing to punt on spending cuts by allowing sequestration to do all of the dirty work but there are other ways to cut spending that make sense.

Clearly, cutting healthcare spending has to be a priority.

The United States spends a lot more per capita on health care than other countries and yet has worse outcomes. Surely, we can find efficiencies that allow us to spend less but still have acceptable results.

Social Security is less of a problem but the rate of spending growth could be slowed by making it more attractive for older workers, say up to age 75, to remain in the workforce if they choose to do so.  

It would be unreasonable to force a carpenter or a factory worker to stay on the job for another few years but an older worker in a less physically demanding line of work might want to continue working for another few years if they were incentivized to do so. Postponing the average retirement age by even a few years would greatly reduce the rate of growth in Social Security spending.

On the revenue side, David Stockman, director of the Office of Management and Budget under President Reagan, suggests a consumption tax-a national sales tax-to both raise additional revenue and to encourage saving.

"The ideological polarization is so great that the system has become dysfunctional," Stockman said during an interview on The Daily Ticker. "We're drifting into a fiscal calamity."

Even if a consumption tax is a good idea-and that is debatable-can you imagine today's Congress passing anything so politically unpopular?

Good luck with that, David.

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