US fiscal time bomb is about to explode. Here's how to defuse it.
The bad news is that Washington has to make hard choices now to avert disaster. The good news is that some members of Congress are showing real political courage.
American leaders on the left and right are increasingly acknowledging that unless we take dramatic steps to reduce our deficits and debt, we may face not just another economic crisis but the end of American prosperity and leadership as we know it.Skip to next paragraph
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No one knows precisely when we will reach this economic tipping point, but I would argue we have no more than five years to put ourselves on a sustainable course. Change on this scale does not happen overnight. The time to start making hard choices is now.
The urgency of this threat has been explained well by two leading economists, Kenneth Rogoff, former chief economist at the International Monetary Fund, and Carmen Reinhart, of the University of Maryland. They argue that when the ratio of debt to gross domestic product (GDP) reaches 90 percent in an advanced economy like ours, economic growth slows considerably – at least 1 percent annually – while interest rates and inflation rise.
Under President Obama's own budget, we will reach this tipping point in 2020 according to the Congressional Budget Office. However, if you reject Washington's Enron-style accounting and include the money we steal from the Medicare and Social Security trust funds, our total "gross debt" will reach 91 percent of GDP this year.
The only way to avoid this crisis is to cut spending, raise taxes, or reform entitlements.
Unfortunately, history shows that the preferred choice of Congress is to raise taxes and avoid the hard work of prioritizing spending and reforming entitlement programs.
Option No. 1: Raise taxes
Congress has raised the payroll tax that funds Social Security 20 times, while the tax that helps fund the hospital insurance portion of Medicare has been raised eight times. Unless the American people demand that Congress take a different approach, we will once again see politicians propose new taxes, such as a value-added tax (VAT), to avoid a catastrophe.
In spite of Congress's tendency to raise taxes and put off reform for another day, I'm optimistic that the scope of our long-term debt problem will lead to true spending restraint and reform.
First, we've run out of taxpayers. There simply are not enough workers per retiree to fund the status quo. Taxes would have to be raised to wildly unrealistic levels – rates would have to double – to keep these programs afloat.
Second, the American people will not tolerate tax increases while Congress squanders at least $350 billion every year in wasteful, duplicative, and inefficient spending.
Option No. 2: Cut spending
It's true that cutting spending alone won't solve all of our problems but it is the place we must start. The American people will never trust Congress, an institution with an approval rating of 20 percent, to reform entitlement programs when we spend billions on failing programs and earmarks that benefit no one other than a member of Congress and a campaign contributor.
Those who claim it is too hard to cut domestic spending are misreading the electorate and misrepresenting history.
Over the past decade, federal spending has doubled. Yet few Americans would say we're better off.