There is no small amount of irony that Washington swelters in hell-like temperatures as leaders sweat out the devils in the details of the debt-ceiling deal. And while Washington seems to have finally grasped the notion that the United States cannot afford default, leaders seem to be ignoring Standard & Poor’s warnings that even if the U.S. raises the debt ceiling, there could be a downgrade in early August if lawmakers don’t agree to a credible debt-reduction deal.
While raising the debt limit will provide a short-term increase in the country’s borrowing authority and avoid default, it is no longer enough for us to say we will pay our bills. We have reached the point where jumping out of the frying pan is only landing us in the fire.
When it comes to what constitutes a credible commitment to debt reduction, S&P is clear. We must find a way to reduce the debt by about $4 trillion within three months and we must guarantee that this newfound spending discipline will stick.
So far, no single plan on the table meets S&P’s criteria.
The McConnell-Reid deal would allow the president to raise the debt ceiling three separate times and cut $1.5 trillion in spending without any change to entitlement programs. It would also create yet another commission that may suggest spending cuts but with no guarantee of implementation.
The Gang of Six proposal seems to meet the $4 trillion threshold but most of the savings are the product of tax increases.
The House symbolically passed the Cut, Cap and Balance bill, but this plan exempts big-ticket items that are the source of our future fiscal imbalance: interest on the debt, Medicare, Social Security, War on Terror spending and veterans’ health care benefits. When it comes to enforcement, the Balance part of the bill beats the aforementioned plans. However, not being the ugliest at the beauty pageant is a poor ambition when so much is at stake.
Tackling the debt and avoiding a downgrade will require fundamental spending reforms, especially to the greatest drivers of our future debt — Social Security, Medicare and Medicaid. We also must engage in fundamental tax reform to encourage growth and reduce uncertainty.
These are multifaceted transformations that will require complex debate beyond the August 2 debt-ceiling deadline. How then can we make a credible commitment to reduce the debt and signal to our creditors that we are serious about reining in spending?
There are a number of institutional reforms that can be passed in the near term to lock in the spending cuts and avoid the wrath of the credit agencies. The Joint Economic Committee of Congress introduced a strong set of budget process reforms intended to tighten Congress’s belt when it released the Maximizing America’s Prosperity (MAP) Act. Good reform ideas that have been floated emphasize ending long-standing budget gimmicks like the abuse of emergency spending.
Reforms also need to be built to last so that they cannot be undone by politics when the public’s attention shifts away from the debt-ceiling debate. History demonstrates that Congress will not abide long by fiscal discipline. The Balanced Budget and Emergency Deficit Control Act of 1985 (a.k.a. the Gramm-Rudman-Hollings Act) came out of a similar spending crisis and was meant to bind spending. By 1990, it was clear that Congress had put into place so many loopholes and exemptions that the framework had fallen apart.
Whatever the final deal that gets us to raising the debt ceiling, we must not mistake alleviating this symptom for conquering our disease. We are in this mess because government spends too much money. It now borrows 40 cents for every dollar it spends. Interest on the debt is now roughly $215 billion. The question is not will interest rates go up, but when and by how much.
S&P has issued two warnings: one that triggers a downgrade if we default on debt payments and another that triggers a downgrade if the U.S. fails to commit to serious debt reductions when the debt ceiling is raised or shortly after. We don’t have the luxury of choosing which one to address. We must deal with both — and soon.
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.