BOSTON — Whoever chose Nov. 23, the day before Thanksgiving and one of America’s most cherished holidays, as the deadline for the recommendations of the Select Committee on Deficit Reduction surely had a perverse sense of humor.
Barring a last-minute miracle of bipartisanship, there’ll be no salvation for this country’s debt and deficit problems.
To get a harsh preview of what the future could hold in store for America without bold action, Super Committee members should look across the Atlantic at our European partners, because it’s in the mirror of Europe that you can see America’s fate.
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In the past 10 days, governments have fallen in both Greece and Italy over the grave financial problems in those countries. But despite the resignations of Prime Ministers George Papandreou and Silvio Berlusconi, and the promise of more fiscal austerity from the new Greek and Italian governments, their enormous public debt and their weak economies suggest that worse days are coming, not just for Greece and Italy, but for all 17 nations using the common European currency.
The United States is not in much better shape. Our sovereign debt of $14.9 trillion in an economy that produces total gross domestic product of $15.2 trillion gives us a debt-to-GDP ratio of 98 percent, not that far from Italy’s 118 percent. And Italy’s federal budget is in much better shape than our own. Italy’s budget deficit is $108 billion, or 9.8 percent of total government spending of $1.1 trillion. The US federal budget deficit is $1.3 trillion, equal to 36 percent of total spending of $3.6 trillion. Moreover, Italy’s deficit is a mere 5.1 percent of GDP, while in the US, the budget deficit equals 8.6 percent of total economic output.
What pushed Greece and Italy to the brink, and caused their governments to fall, is the cost of servicing their sovereign debt. As capital markets lost confidence in their ability to meet payment obligations, the cost of borrowing rose higher and higher. For Italy, interest rates exceeded 7 percent. Greece has needed huge bailouts from its euro zone colleagues who, in turn, have demanded ever more stringent spending cutbacks – and more are coming soon. Now, it’s Italy’s turn in the financial woodshed.
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In America, the cost of servicing the country’s enormous public debt equals $218 billion a year. But the interest rate America is paying is highly favorable, only 2.9 percent in September. You don’t have to look far back in history to find a time when interest rates paid on the public debt were much higher.
In the year 2000, when US total public debt was a “mere” $5.7 trillion, the interest rate paid to service it was 6.63 percent. If interest rates rose to that level again, because of inflation or because nations who buy US Treasuries lost confidence in America’s ability to control its debt and spending, then the US will find itself in very dire straits.
Annual debt service costs will rise to more than $500 billion. That would force massive cuts in federal spending. To put that $500 billion figure in perspective, the US spends $723 billion annually on all Social Security payments, $824 billion on Medicare and Medicaid, and $701 billion on national security and defense – the three largest items in the federal budget.
Americans would be very foolish indeed to think we’re that much better off than the Greeks or the Italians, because this country is headed right for that very same cliff.
This is the backdrop for the final days of the Super Committee, and next week’s deadline to find $1.5 trillion in budget savings over the next 10 years. Those savings can come from spending cuts, tax increases or some combination of both. Every sane person who has looked at the situation has come to the same conclusion: there must be a combination of both. But politics as it is now practiced in Washington would appear to relegate logic to the scrapheap while elevating narrow, partisan interests.
Thoughtful people of different political persuasions have offered the same reasonable and obvious solutions – a balanced mix of carefully chosen reductions in retirement benefits, health-care expenditures and defense programs combined with a reform of the tax system that replenishes some healthy portion of the trillions of dollars lost in the Bush tax cuts of 2001 and 2003.
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Of course, we cannot just cut and tax our way to a better future. We also have to reignite economic growth. But we are unlikely to succeed at that until we restore confidence among the public at large as well as within the business community, that the US government has the ability to put the nation’s fiscal house in order.
Congress as a whole must vote by Dec. 23 on whatever plan the Super Committee puts forward. If Congress does not act, then on Jan. 15 of next year, automatic spending cuts of $1.2 trillion will be imposed equally between defense and domestic programs.
Such an outcome would send dangerous signals to the global markets and could put this nation on the same terrible path being walked right now by our friends in Rome and Athens.
Philip Balboni is Chief Executive Officer and Co-Founder of GlobalPost.