Tuck

Slaughter & Rees Report - As Washington Burns, It Gorges on Green Eggs and Ham

September 30, 2013 --

Washington was atwitter last week over a U.S. senator who spent 21 consecutive hours talking on the Senate floor: no sitting allowed, and no bathroom breaks, either. He mostly railed about defunding “Obamacare,” but at one point he digressed to share his affection for the children’s story “Green Eggs and Ham,” penned by Dartmouth alumnus Dr. Seuss.

All this might be funny were it not so serious. This talk-a-thon came near the end of a fiscal year in which Congress and the President have mostly talked past each other and thus made no meaningful progress on the serious matters of America’s finances.

The first bill for inaction comes due tonight. Fiscal year 2014 starts tomorrow. But if a budget for fiscal year 2014 has not become law by midnight tonight, then tomorrow the federal government shuts down. The prospect of national parks closing and the Smithsonian museums being shuttered nicely illustrates the dysfunction in Washington (though in reality only about half of all federal employees get furloughed: the rest are deemed “essential” and still must show up for work).

The second bill for inaction comes due sometime this month. The total amount that the U.S. government can borrow is set by law, and in mid-May that $16.7-trillion “debt ceiling” was hit. Since that time, the U.S. Treasury has been paying America’s bills using the same creative adjustments—e.g., paying some bills late—as struggling businesses and families. But there is soon to be no more spare change to be dug out from under the sofa cushions. Treasury Secretary Lew last week informed Congress that by October 17 America will have only about $30 billion left to pay its bills. As in summer 2011, global markets are again contemplating the frightful prospect of a Treasury default if a new law raising the debt ceiling is not passed. The cost of insuring against this event via credit-default swaps reportedly rose six-fold last week.

As if somehow resolving these two bills is not a tall enough order, don’t lose sight of the fact that neither—theatrics notwithstanding—touches the most important fiscal problem confronting America over the long term: the combination of an aging population (people over 65 are projected to account for 19 percent of the U.S. population in 2030, up from 12.4 percent in 2000) and, especially, rising health care costs. Over the next 25 years, says the non-partisan Congressional Budget Office, federal debt will rise to 100 percent of gross domestic product, interest payments on the debt will rise from 1.3 percent of GDP today to nearly 5 percent of GDP, and spending on major entitlement programs will consume 14 percent of GDP (the historical average is seven percent).

There is a clear and compelling case for meeting this problem with initially modest, phased-in spending restraint and pro-growth tax reform. Alas, we see almost no political energy toward this solution. Our pessimism is partly a byproduct of the reality that the two sides are far apart in their priorities. But underlying the entrenched positions is another reality recently explained by the CBO: the federal budget deficit has been falling this year—thanks to a slightly stronger economy, January 1 tax increases, and sequestration (misguided though its priorities are, as we have earlier written)—and is projected to continue falling for a few more years before the entitlement pressures quickly build.

If October can pass without a catastrophic U.S. Treasury default, this near-term deficit moderation will likely quash any serious effort to address America’s long-term budget problem. History is quite clear on this: absent a crisis, government leaders are often loathe to incur short-term political pain to solve problems that, in political terms, won’t come due for an eternity.

We are not holding our breath, and we suggest you not do so as you watch the coming days unfold.  But, then again, you never know. Who would have thought that Sam would like green eggs and ham?

Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.

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