After nearly three years of partisan push-pull on a deficit reduction deal, The Center for American Progress (CAP) announced on Thursday that, “it’s time to hit the reset button on the entire fiscal debate.”
The progressive public policy organization gave up on pursuing a “grand bargain” with Republicans on the federal budget. Instead, CAP President Neera Tanden told HuffPost that we need “to reset economic policy in Washington to focus on growth instead of deficit reduction.” Tanden is referring not only to economic growth, but also to growth of government, as if one necessarily drives the other.
The failure of the stimulus to efficiently create jobs—the cost per job was about $300,000—suggests that more government spending does not mean more economic growth. Nevertheless, CAP advocates a repeal of the sequester, as well as a $5 billion-a-year increase in spending on infrastructure, $2 billion on preschool education, and $1 billion on job programs for low-income Americans.
In fact, CAP blames the sequester on the public’s concerns with the large national debt, echoing Paul Krugman’s Keynesian mantra that only government spending, and thus running deficits, can save us from “our unemployment trap.” According to CAP, “there is clearly no need for deficit reduction to take precedence over every other important issue facing the country.”
Yet, the deficit is the most important issue facing this country because it’s the metric that reveals that bloated and exponential growth of government is unsustainable. The growth of public debt crowds out private investment, raises interest rates, and increases inflation.
Today’s interest on the U.S. national debt is roughly $400 billion a year. When interest rates rise, interest payments will overshadow other government spending, leading to a cycle of borrowing and increasingly higher interest rates.
CAP accuses Republicans of being unwilling to compromise. Yet under President Obama’s recent budget proposal, the federal government will continue to run a deficit every year, and payments on the national debt will quadruple over the next decade, crowding out the private sector.
Partly because of this budgetary squabbling and partly because of the state of the nation’s finances, Standard & Poor’s downgraded the nation’s credit rating from AAA to AA+ for the first time in 70 years.
So what does it mean that now Microsoft has a higher credit rating than the federal government? Less confidence in the government’s fiscal situation means that people associate more risk with the Treasury, which means investors begin to demand higher interest rates for Treasury securities. Higher interest rates leads to increased borrowing prices, meaning that more of the federal budget will have to be devoted to debt service. Incidentally this also means higher interest rates on mortgages, car loans, and credit cards, according to Forbes.
When I see a debt prediction number with 12 zeros, I am gripped with a feeling of unease. I was brought up to believe that “debt” is a four-letter word, and that savings are necessary for financial security and a sense of personal self-worth.
To me, the gargantuan deficit is indicative not only of fiscal irresponsibility but also of social irresponsibility. There is a values side to this debate that has fallen to the wayside as the national perception of “debt” has moved from negative perception into the realm of ambivalence.
It used to be that having one’s fiscal house in order warranted respect, but the message we are consistently getting from the White House is that a balanced budget does not matter. On top of that, our federally subsidized education system is teaching college graduates that loan debt is normal. Debt and “spending for spending’s sake” are becoming the new status quo, a trend that is unsustainable.
Therefore, current policy needs to focus on bringing the debt down relative to the economy. Senator Mike Lee advocates a balanced-budget requirement that would require a balanced federal budget annually, limit federal spending to 18 percent of GDP, and require a two-thirds vote to increase taxes or raise the debt limit.
“A balanced-budget requirement will ensure we do not continue to drive our country further into debt by trying to do all things for all people,” Lee said.
If the GOP surrenders the deficit debate, that’s exactly what’s going to happen.