As she took her seat in the huge stadium, Lucy was hoping for a playful, romantic date with the handsome guy on her left. Her hopes were soon dashed when a grossly obese giant, a mountain of blubber, spilled over into a portion of Lucy’s seat as he struggled to squeeze into the seat on Lucy’s right. Jammed against her hot date, Lucy sat in dead silence, eyes closed, for minutes until she heard the giant yell to a walking stadium vendor, “Four hot dogs please.”
Aghast, Lucy couldn’t restrain herself from blurting out, “You’re actually going to eat four dogs?”
In a reflective, measured reply, the giant explained, “I normally have three. Thought I’d make it five tonight. Then I figured I should start cutting back. So I settled on four.”
With the right measuring rod, anything can look like real improvement. And that’s the scariest part of the completely predictable, last-minute scrambling in Washington to deal with the debt ceiling crisis. As the next chapter of this crisis plays out (one way or the other) and our leaders take to the mikes to spin the facts and confuse the uninformed, Americans should be ever mindful of the measuring rod that has been used throughout the process. It’s a grossly obese, five-dog measuring rod.
Each year the Congressional Budget Office issues its baseline projections of the federal budget and economic outlook for the next ten years. The current baseline projections cover the period 2011 through 2021. The projections reflect the future impact of existing laws under a stated set of assumptions.
Why are these projections such a big deal in the debt ceiling crisis? They’re the measuring rod. Having hit the maximum spending limit of $14.3 trillion, Washington badly needs Congress to authorize additional debt so that the government can continue to borrow 40 cents of every dollar it spends and grow the debt at a pace of roughly $4 billion a day. The Democrats want the ceiling hiked up a mammoth $2.4 trillion so that the crisis will go away for about twenty months as the debt continues its spiral upward through the 2012 elections. Of course, the Republicans are kicking back, some much harder than others.
The CBO’s baseline projections have become the basis for a compromise that will allow the additional borrowing and won’t require any significant spending cuts right now. The concept is that additional borrowing can be authorized if Congress agrees to change the law so that future spending increases are slowed by a like amount over the next 10 years, all measured against the CBO’s baseline projections. The spending and debt follies will continue full steam now, but both sides will have agreed to a little more discipline regarding spending increases in later years.
How bad are the current baseline projections? They’re bad, truly worthy of a five dog label. Based on current laws, the CBO’s January 2011 numbers project that annual federal spending will increase from $3.7 trillion in 2011 to over $5.7 trillion by 2021. So annual expenditures will jump more than two trillion over the next 10 years and will have more than tripled over a twenty-year period. And, under the baseline projections, the growing spending increases will cause the gross federal debt (the debt that is subject to the legal ceiling) to balloon to more than $25 trillion by the end of 2021. That’s why the CBO stated in its June 2011 long-term budget report that spending growth under current law will “cause federal debt to grow to unsustainable levels.”
But as scary as the baseline projections are, the CBO is careful to point out that things likely could play out much worse. The projections assume a healthy growth in gross domestic product (something that is not happening), a continual ratcheting down of the unemployment rate to 5.3 percent by 2016, and that all favorable existing tax breaks and special benefits will expire on schedule and not be renewed – thus producing more revenues for the government. So for budget purposes, the projections assume, for example, that all the favorable Bush tax rates will go away for everyone after 2012 (including all middle and low income taxpayers), that sharp reductions in Medicare physician rates will take effect at the end of 2011 and not be renewed, and that extensions of unemployment compensation benefits and existing limits on the reaches of the alternative minimum tax will expire at the end of 2011 and not be renewed. Because Congress has chosen to extend these benefits in the past and everyone assumes it will do so in the future (a “virtual certainty” is the term many use), the CBO issued an “alternative fiscal scenario” in June 2011 that paints a “more realistic picture.” This new picture projects that the federal debt subject to ceiling will escalate to nearly $30 trillion by 2021. It’s almost unimaginable.
And beyond all this, everyone should understand that this CBO measuring rod completely ignores the debilitating effects of this escalating debt on the economy, which will just make all the numbers even uglier. As the CBO warned in its June 2011 report:
CBO’s projections in most of this report understate the severity of the long-term budget problem because they do not incorporate the negative effects that additional federal debt would have on the economy, nor do they include the impact of higher tax rates on people’s incentives to work and save. In particular, large budget deficits and growing debt would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States.
But as bad as this measuring rod is, we are now being told that it has provided the framework for a “deal.” Given the obese nature of the measuring rod and Congress’ shameful track record of ignoring lessons from the past and forever borrowing against the future, any such deal will insure only one thing: that, over the next twenty months, the government will rack up another $2.4 trillion in debt to accommodate the campaign cycle of our leaders while spending in Washington continues to escalate, albeit at a slightly slower pace than projected by the CBO. We’ll still be growing fatter at a faster pace as we progressively eat more dogs. No real cuts will be made. And, of course, in early 2013 we’ll face another debt ceiling crisis and everything will be back on the table again because the government will have shot its newest $2.4 trillion wad.
What is clear beyond any doubt is that a much tougher measuring rod is required to actually cut the crazy spending and put America on a financial course that has any real hope. If we fatally drown ourselves on debt, it won’t really matter whether the depth of the water was 27 or 30 trillion. Before we get to a point of no return, we must somehow find the will, the guts and the know-how to do what every out-of-control business and family must do – make real, ongoing, progressively larger cuts in the existing too-high spending levels under a smart plan that will solve the problem over time. In other words, we must start cutting back from today’s obese three-dog menu and stop trying to avoid any real cuts by benchmarking long-term against an escalating future five-dog scenario that guarantees failure.
August 1, 2011