How America can avoid becoming the next Greece
In a new paper, 2015: Downgrade Day—Averting Europe’s Fate, Joint Economic Committee (JEC) Republicans explain why America faces a possible Greece-style debt crisis within five years and the steps that can be taken to avoid it. The paper begins by posing a simple question:
Is the United States immune from the sovereign debt crisis now roiling Europe?
The answer, of course, is that America is not exempt from such economic hardships and to think that it is would be foolish. In 2009 and 2010, America’s real budget deficits will equal approximately 10% of GDP. That is higher than it has ever been during peacetime. Our gross government debt is currently growing at a rate of about $192 million an hour. Last week it surpassed $13 trillion— an unprecedented level. It will reach $13.2 trillion this year and soar to an astounding $21.4 trillion in 2020. And, in terms of percentage, the gross government debt will grow to 95% of GDP in 2020, up from 91% in 2010. All of this comes despite the findings of a recent study which suggests that gross government debt above 90% of GDP significantly hampers an economy’s ability to grow. According to the JEC report:
…countries with such a high debt load average GDP growth 4 percentage points below that of less-indebted countries. The U.S. will cross that ominous threshold sometime this year.
But, when it comes to measuring the manageability of debt, the ratio of interest payments to revenue is a more useful gage than the debt-to-GDP ratio. The JEC paper continues:
By the [the ratio of interest payments to revenue] metric, according to a March report by the Moody’s credit rating agency, the U.S. sovereign debt crisis may be a mere five years away. That is when federal interest payments are projected to exceed 14% of revenues, the level the agency regards as the point of no return for America—when debt service begins to constrain our government’s ability to change its financial course.
Fortunately, this economic crisis can be averted. In their paper, the JEC Republicans include several proposals that would help return fiscal sanity to America. First, spending must be controlled. The massive deficits and $13 trillion national debt that currently plague our nation have resulted almost exclusively from excessive spending. Over the next decade, federal revenues will average an extraordinary 18.8% of GDP; that is higher than the post-World War II norm of about 17.7%. Meanwhile, outlays will average 24.1% of GDP during that same time period; that is nearly one-fourth higher than the post-war average of 20.2%. Also, over the next decade federal interest payments will triple, rising from 5% of outlays to more than 15% by 2020. A majority of that growth in debt service costs is driven by the three largest entitlement programs: Social Security, Medicare, and Medicaid. And, as the JEC Republicans observe, these three programs are soon to be joined by a fourth: President Obama’s health care reform. In order to gain control of this runaway spending, the federal government must first work to reform the entitlement system here in America.
But is it even possible to significantly reform the America’s big spending entitlement programs? Although the paper suggests that meaningful action is unlikely, evidence shows that it is certainly possible:
In the past two decades, when faced with structural budget deficits, Canada, Sweden, and Finland have all cut government spending by 20% within a few years, without societal upheaval. Indeed, a recent study of OECD macroeconomic data from 1970 to 2007 finds that spending cuts are the key to successful fiscal adjustments—and are generally better for the economy than tax increases.
That authors of that study, Alberto Alesina and Silvia Ardagna, state:
…fiscal adjustments… based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.
In light of this information, the JEC Republicans suggest a few measures that would help to reign in runaway government spending. In place of disingenuous budget reforms such as “pay-as-you-go” rules– which include loopholes that have allowed Democrats to add a staggering $173 billion to the deficit in three months under the law’s “emergency” escape clause– the JEC paper advocates a Balanced Budget Amendment, with a supermajority vote required to approve emergency spending:
Most states have a BBA in some form. A federal BBA would enshrine the desirable goal of annual balance…
The paper also proposes direct limits on spending or on revenue which would increase the pressure on elected officials to reduce federal spending:
…one popular way to limit revenue, employed in some states, is to entitle taxpayers to automatic tax cuts and rebates when revenue exceeds a certain threshold, usually defined as a percentage of personal income. Another popular approach is to require a legislative supermajority (say, two-thirds) for any tax increase.
As for spending limits, they could take the form of binding caps enforced by automatic, across-the-board cuts if outlays exceed a certain threshold (for example, 20% of GDP). Pegging limits on revenue or spending to GDP would in effect cap the federal share of the nation’s resources and thus establish a salutary social contract between the private and public sectors.
Lastly, the report argues for “serious negative consequences” for elected officials when they fail to remain within these spending constraints. The elimination of lawmakers’ salaries in years that spending caps are breached, for example, may push them to get over their differences and work together in order to avoid financial and political embarrassment.
Whether these solutions or other proposals are used to address America’s economic woes, one thing is clear: federal spending is spiraling out of control. And the longer that this runaway spending is allowed to continue, the closer America comes to its own Greece-style economic collapse.
