With the bipartisan "Gang of Seven" reportedly hitting high gear this week in negotiations on the federal debt, the odds of agreement by the self-imposed July 1 deadline seemed to improve substantially.
What kind of deal it might turn out to be, of course, is anyone’s guess. With the Aug. 2 deadline to raise the federal government’s $14.3 trillion debt ceiling or face the prospect of default on its obligations, the pressure mounts for some deal, any deal.
It would be extremely reckless to even flirt with default. But symbolic or imprudent spending cuts carry their own risks.
The best way to quickly assess any deal that emerges is to compare it to the causes of the nation’s staggering debt. In other words, how well does the proposed solution align with the drivers of the debt?
To do that analysis, you need to know what turned a projected $2.3 trillion surplus–that’s what the Congressional Budget Office forecast a decade ago–into an estimated $10.4 trillion shortfall. Thankfully, the non-partisan Pew Fiscal Analysis Initiative has done the hard work in breaking down this nearly $13 trillion shift.
Its research shows that roughly two-thirds of the debt piled up since 2001 has resulted from new legislation. Of that, spending increases represented 60 percent and tax cuts accounted for 40 percent.
What are the biggest "legislative drivers"? The 2001 and 2003 Bush tax cuts were responsible for 13 percent of the decadelong shift, followed by growth in net interest due to legislative changes (11 percent), growth in non-defense spending (10 percent), the wars in Iraq and Afghanistan (10 percent), and the 2009 stimulus package (6 percent). The largest non-legislative driver, not surprisingly, was the Great Recession, which dragged down tax revenues.
Two things seem clear: First, the flood of red ink did not happen overnight, so stemming the tide will take time. And second, the biggest factors were choices on both spending (from defense to health care) and taxes (federal collections as a percentage of GDP have not been this low since the early 1960s), so a realistic solution must address both.
If anyone tries to sell a quicker, easier remedy, don’t buy it.
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