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The Spectacle Blog
The Congressional Budget Office today released a new report on the risk of a fiscal crisis occuring in the United States due to our long-term debt, and its conclusions largely echo points that I’ve been trying to make repeatedly.
The bottom line is that the longer we prolong dealing with our debt problem, the greater the risk of a fiscal crisis, and the more unattractive the options become for digging ourself out of the mess.
Some of the report undermines arguments that conservatives are trying to advance — the CBO says, for instance, that largely extending the Bush tax cuts will significantly add to the deficit. But broadly speaking, the report presents a reality that is quite constistent with arguments conservatives have been trying to advance for years.
It outlines several consequences for growing debt, including crowding out of private investment and the need for higher taxes and/or spending cuts. Of higher taxes, however, it warns that, “To the extent that additional tax revenues were generated by increasing marginal tax rates, those rates would discourage work and saving, further reducing output and incomes.”
The CBO also makes another point — one which I constantly emphasize to conservative friends who say they’re mainly interested in national security — that a failure to address our fiscal situation will undercut military readiness.
“Having a small amount of debt outstanding gives policymakers the ability to borrow to address significant unexpected events such as recessions, financial crises, and wars,” the CBO writes. “A large amount of debt could also harm national security by constraining military spending in times of crisis or limiting the ability to prepare for a crisis.” It also notes that, “increased dependence on foreign investors that would accompany a rising debt could weaken the United States’ international leadership.”
While the CBO notes that it’s hard to predict with any degree of accuracy when or if the U.S. would encounter a fiscal crisis, it says that, “all else being equal, the higher the debt, the greater the risk of such a crisis.”
Once a fiscal crisis actually occurs, the options get even worse. They include restructuring debt or causing inflation, both of which would run the risk of raising interest rates for government to brorrow money. Inflation would not only have negative economic consequences, but it would also increase future deficits. As an example: “if inflation was 1 percentage point higher over the next decade than the rate CBO has projected, budget deficits during those years would be roughly $700 billion larger.”
The response to the fiscal crisis, the CBO anticipates, would likely include an austerity program with a mixture of tax increases and spending cuts. Yet those emergency measures will have to involve much more severe actions than what would be required if we were to address our debt problems now.
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More Blog Posts by Philip Klein
http://spectator.org/blog/2010/07/27/cbo-warns-of-increased-risk-of
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Steven| 7.27.10 @ 8:07PM
Did anyone notice that you can't access that website from the CBO anymore?
c r cusick| 7.28.10 @ 7:58AM
Typical CBO-dwell on everything but the 800 lb gorilla in the room. Spending is the key. Cuts cuts and more cuts. Every business person who has ever faced reduced revenues knows the only way to survive is to face and implement unpleasant cuts. This congress has very few business people and worse yet is that the president's cabinet and czar staff are all academics and politicians. I'm afraid we are like drug addicts who see the bottom coming but continue to spend until we are shocked by hitting the bottom.
John Schroy | 7.29.10 @ 2:40AM
The CBO deals only with the budget, which is dismal enough. However, economic recovery will depend upon fixing the problems that create the Crash of 2008 and, at the same time, repealing the regulatory nightmare created by Obamacare, Dodd-Frank, etc.
The damage that Obama is doing goes far beyond the budget.
Ellis Wyatt| 7.28.10 @ 11:31AM
To a large extent the CBO is handicapped by only being able to report the face value of a decision and not analyze the costs of the unintended consequences of a policy decision. Hence, those who support the massive tax increases in 2011 due to the expiration of the "Bush tax cuts" will point to the simple point that they will add to the defecit without bothering to understand the real costs of the following comment that the increased taxes will lower tax revenues by causing a smaller tax base through lost jobs, and decreased productivity and investment.
We do not have a revenue problem in this country, we have a spending problem and until that is addressed we will be saddled with this large debt caused by the political class of this country.
pugsley| 7.28.10 @ 12:27PM
This is the final chapter in the progressive playbook. With the last of their fiscal shenanigans in place the country will slowly but surely go broke. At that point the progressives will have to roll up their sleeves and get to work to remake America. This is the goal and the end game. We are stareing down the barrel of the progressive gun and it is cocked and loaded.
Derek Leaberry| 7.28.10 @ 2:50PM
You can't say that we aren't experiencing history. A morally and fiscally bankrupt country is falling into an abyss. But look on the bright side. We'll have homosexual marriage, homosexuals openly serving in the military, government run health care, affirmative action and quotas for everyone except white males, anti-American presidents, a Third World majority, and a feminized culture, including a feminized military. Benjamin Franklin, James Madison and George Washington would weep if they could see how their experiement ended up.
mmm| 7.28.10 @ 10:06PM
wish i could cut more expenses but ive been rail thin since the 2000-2002 market crash and the rip-off low interest rates that took away my dollars earning ability and when i saw that house prices were also taking away my dollars value from the rip-off of the non counting of inflating house prices as inflation.....thus poverty..