Financial crises are complex, baffling things, but we all understand their impact on ordinary families. Take Demi and Rex. Like many American couples, they borrowed aggressively in the years before 2007. They have a big house, two big cars, four big wardrobes, and one big pile of debt, roughly three and a half times their combined incomes.
Demi blames Rex. He blew the cash he got from pre-crisis tax cuts on a hunting rifle and a midlife-crisis Harley-Davidson. Rex blames Demi. After the financial crisis struck, she went on a spending spree, landscaping the garden and hiring a maid. Demi thinks Rex needs to contribute more to the housekeeping. Rex thinks Demi needs to spend a whole lot less.
For weeks, their kitchen in Washington, D.C. (did I forget to mention they lived there?), has been the scene of bitter altercations. Insults have been traded. Dishes have flown. Things got so bad that at one point Rex threatened to call up the bank and freeze their joint account, even though this would have wrecked their credit score.
Of course, the recent wrangling between Democrats and Republicans has been much more frivolous than a domestic row—but with potentially much graver consequences. Ten years ago the federal debt was equivalent to less than a third of U.S. gross domestic product. Now it is nearly two thirds. If nothing changes, according to the Congressional Budget Office (CBO), the federal debt could exceed GDP by 2021. Interest payments alone could absorb roughly two fifths of all federal revenues by 2031.
So everyone agrees that the government has to address the debt, and soon. But what should be the mix of spending cuts and revenue increases? In a bid to ingratiate themselves with the anti-big-government Tea Party movement, House Republicans have refused to raise the debt ceiling without a prior deal with Democrats on the deficit that excludes any increase in revenues. The deadlock has increased concerns at home and abroad that the United States may ultimately default on its debts.
On July 19, a bipartisan “Gang of Six” senators proposed a compromise. But because it involves modest revenue hikes, it has little chance of making it through the antitax gantlet of the House. Even if it does, Americans should be concerned about the game of brinksmanship going on in Washington.
The very fact that the word “default” now regularly appears in the same sentence as “United States” illustrates the folly of the House Republicans’ strategy. Who among us knowingly jeopardizes his own credit score? To risk doing so now, even as the economic agonies of Southern Europe illustrate the dangers of losing fiscal credibility, beggars belief.
The fiscal arithmetic is stark—and it can’t be adequately addressed by spending cuts alone. Even before the financial crisis, federal spending was bound to rise because of demographic pressures and rising health-care costs. With current policies, total spending will average at least 23 percent of GDP in the current decade, rising to 27 percent in 2031, compared with 21 percent in the period 1971–2009. To keep federal revenues at their long-run average of 18 percent—in other words, to avoid raising new revenue—while eliminating the deficit therefore implies truly drastic cuts.
In the words of CBO Director Doug Elmendorf: “If Social Security and the major health programs faced no cuts, then defense and other noninterest spending would need to be cut by about 60 percent. Alternatively…outlays for Social Security and the major health programs would need to be cut by about 40 percent.”
Reduce national security by three fifths or Social Security (and Medicare) by two fifths. That is the choice implied by the “No New Revenue” dogmatists, who oppose even the elimination of tax loopholes. It does not sound to me like an election-winning platform—more like a domestic row gone nuts.