Nothing more clearly illustrates the political bankruptcy of our national leadership than its failure to deal with the key issue facing America—how to cope with our debt and our deficit. Last year's deadlock over raising the debt ceiling, required to avoid default on our dollar debts, wasn't resolved by the president and Congressional leaders. They just kicked the can down the road by fudging together a concoction of government spending cuts and tax increases; it was not a policy review but more like a party game of "think of a number." For the Republican players, it was think of a larger number for spending cuts than the other side just mentioned, and for the Democratic players, it was think of a smaller number of tax reliefs than the Republicans put forth. Out of this reverse bidding war there emerged the package all knew was absurd but told a skeptical world would allow them time to work out a sensible budget by November and, in the "unlikely" event they couldn't, the whole mish-mash would come into law, without further legislative review, after December 31, 2012.
Talk about the clock striking midnight. This would be it. We'd then all tumble over the so-called fiscal cliff. Another name for it would be the Obama-Boehner postdated suicide pact. It takes some $600 billion out of an economy that never really got going after the crisis of 2008.
This slapdash amalgam of cowardice and obstinacy, imposing a major shock to our economy, is not the way to change the velocity and direction of our unsustainable and dangerous fiscal trajectory. The tax increase is the largest component of the fiscal package deal, totaling about $532 billion. That includes letting the Bush-era tax provisions expire, so the top marginal tax rate would jump and capital gains taxes and dividend taxes would all go up. A total of 40 different tax benefits would vanish in a puff of smoke on New Year's Day. The second part of the deal is an automatic additional $109 billion of spending cuts, or sequestration. It's a killer blow that would impose a level of austerity on the economy so quickly, and in such a large amount, that it would not only slow down the economy, but also would almost certainly bring us another recession. Without a deal, the economy could swing from its current sub-2 percent growth rate to as much as a 2 percent decline. Indeed, a calculation by the Council on Foreign Relations shows that in the full calendar year, this would represent nearly a 4 percent reduction in gross national product. The head of the Federal Reserve, Ben Bernanke, was quite blunt in his assessment of how the effects on growth might be counteracted: "I don't think our tools are strong enough to offset the effects."
This year alone we are looking at a fiscal deficit now estimated around $1.1 trillion, or roughly 7 percent of GDP. This is the equivalent of adding $25 billion of debt every week and is clearly unsustainable.
We must never forget the power of compound interest on our mammoth deficits. Escalating interest costs will add to the debt to the point of absorbing over 20 percent of our revenue base in the coming years. This will have an enormous impact on our fiscal flexibility and on what the government has to do in order to keep our economy healthy and improve the quality of life of all of our people. We cannot just put off the evil day. Procrastination here is like putting off repairing a bridge (another thing we are good at postponing until the bridge falls down), dooming us to fall into an abyss created by two parties in a gridlock the American people have protested year after year. We need short-term pain for long-term gain.
If we don't deal with our deficits, the ratio of debt to GDP will inexorably climb from its current level of around 73 percent today to over 90 percent, jeopardizing the entire financial stability of the United States. A terrible prospect for us, and a worse one for the next generation. The electorate is continually underestimated. People are not stupid. By and large, they are more pragmatic than dogmatic. They understand that we are facing a critical issue in the form of the debt ceiling, which the whole world watches. In 2011, Congress authorized a debt limit of $16.4 trillion. Today our national debt is around $16.3 trillion, and the estimate is that the federal deficit will reach the debt ceiling before the end of this year or shortly thereafter. This is the most dangerous component of the fiscal cliff and will be the driving force behind any deal reached during the lame-duck session of Congress. Without raising the debt ceiling, the country faces a potential default that would lead to a significant downgrade of its credit rating, one that would reverberate through the global capital markets.