For the first time since the late 1700s, the United States of America is at real risk of financial default. Other countries have defaulted before, but never as the result of deliberate foolishness. In 1939, in a fit of form over substance, the U.S. Congress created the "debt ceiling," a legal limit on our debt. Since then, that limit has been raised over 80 times. As a tool of fiscal discipline, it has underperformed, to say the least.
As a tool for highlighting political hypocrisy, the debt limit is unimpeachable. Members of Congress routinely vote to cut taxes or raise spending, both of which require borrowing that they then vote against. That's like running to the store, buying a flat screen TV, and then making a big show of not paying your credit card bill because of your mounting debt.
But this time, the sham has become deadly. Should the debt ceiling not be raised, the government will be unable to pay bills such as Social Security checks, Medicare payments, and salaries for our soldiers, judges, and air traffic controllers. Equally worrying, the U.S. would almost certainly lose its AAA credit rating, a national asset we have guarded for two centuries. Once again, middle-class families who can afford it least will suffer most—through increased interest on mortgages, small business loans, and credit cards, and through damage to retirement accounts and other savings.
While debates over the debt ceiling have reached fever pitch, it's been months since Congress seriously considered the problem most Americans see every day: a weak recovery and unacceptable levels of unemployment.
If there's one redeeming feature of the debt ceiling chicanery, it's the discussion it has prompted on how to address the unsustainable path of our nation's finances.
Warren Buffet famously said that "only when the tide goes out do you discover who's been swimming naked." Since 2000, when the Congressional Budget Office projected year after year of government surpluses, we've been swimming naked. We've spent without discipline on two wars, a drug benefit for Medicare, and a stimulus bill to jumpstart the economy. And we've taxed less and less, to the point where the federal tax burden we feel is now at its lowest level since 1958. So when the economic tide went out three years ago, there we stood, our trillions of dollars of debt for all to see.
As usual, the fevered rhetoric surrounding our finances is not helpful. Those interested in allocating blame for the debt find that it must be shared between Presidents and Congresses of both parties and notably, on the Great Recession.
The misinformation and demagoguery have been even worse. No, we are not three months away from becoming Greece. Yes, the magnitude and timing of spending cuts really matters; cut too much too soon, and our hesitant recovery might fall back into recession. And yes, the long term problems in Medicare and Social Security are real and should be equitably addressed sooner rather than later.
Anyone familiar with the details of these challenges knows that success will look something like the proposals made by the Simpson-Bowles Commission or more recently by the Senate's Gang of Six. Both proposals included significant cuts, additional revenue achieved mainly by eliminating tax loopholes and deductions, and proposed reforms to Medicare, Social Security, and Medicaid. Both proposals received bipartisan support from strange bedfellows like Senators Dick Durbin and Tom Coburn. Both proposals were also condemned by both ends of the political spectrum and by many interest groups.
Those (like most of the Republicans in the House) who insist that no additional revenue should be on the table must acknowledge that a "cuts alone" strategy would devastate our nation's investment in the highways, airports, and other infrastructure critical to our nation's prosperity. They must acknowledge that spending cuts will reduce or end the availability of education and health care to many of our least advantaged citizens. This is particularly true if we hesitate to make the huge defense and security budgets share in the effort. And they must explain why taxing the very wealthiest among us at the rates they paid in the 1990s would prohibit the stunning economic growth we experienced in precisely those years.
On the spending and entitlements side, we must acknowledge that because of our aging population and the continuing climb in health care costs, Social Security, Medicare, and Medicaid, if unreformed, will eventually squeeze out all other spending.
Social Security is the lesser and least urgent of these challenges. It is capable of paying promised benefits until around 2037. But ominously, for the first time last year, Social Security paid out more than it took in. That is a clarion call for us to do what Ronald Reagan and Tip O'Neill did in 1983 and reform the program to assure its availability for generations to come.
Reforming Medicare is a larger, more urgent, and more politically challenging issue. Medicare has unfunded liabilities (promises it has made to the Americans alive today) totaling almost $40 trillion. Working Americans pay into the system, but the average American family will receive more than $200,000 more in benefits over a lifetime than he or she pays in.
We all worry about our health care, particularly as we age. As we saw in the health care debates of 2009 and in the response to Congressman Ryan's Republican plan to "voucherize" Medicare, the topic can be used as a powerful political weapon, often at the expense of reform. Fortunately, in a delivery system as wildly inefficient as ours, there is much we can do to cut costs without affecting the availability or quality of care or without simply shifting costs as proposed by Chairman Ryan. Just ask citizens in other industrialized countries who have better health care indicators at roughly half our per capita cost. The federal budget, our economic health, and our capacity to keep the promise of health care for our seniors may depend on another look at how our nation conducts the business of health.
Time is short. As I have said for months, we should never have let the sham of our debt ceiling imperil our credit and our hesitant economic recovery. But if we seize the moment to achieve a comprehensive plan for financial stability, perhaps it will have been worth it. If not, we'll have this discussion again soon, not because of the debt ceiling, but because our creditors will force it.
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