Last Updated: Wed Jul 27, 2011 21:41 pm (KSA) 18:41 pm (GMT)

Paul J. Sullivan: Debts, Deficits and Dysfunctional Leadership

Paul J Sullivan

So here we are heading toward the brink of more terra incognita with likely the most dysfunctional Congress in the history of the United States. Not long ago we were in the throes of a possible government shut down. I remember it well because I was planning a very complex international energy study trip to the GCC with the background noise that it may not happen because the funding would not be there and all civilians would be put on furlough. That means you can’t work even if you have significant responsibilities to get things done.

Surely this is an absurd concept, but under US law if the government cannot pass a “Continuing Resolution” it pretty much shuts down much of the government. It has happened before.

This also could have meant that senior citizens, those on economic support due to medical or other reasons, scholarships, and more would also not have been paid out on time. Eventually the bills would have to be paid, but not on time. Some federal salaries, etc. may not have been paid. That was up to question.

If a family or a business ever tried this stunt their credit rating would get hammered. Their reputations would be tarnished and it would be hard to get out of that sort of mess.

Most credit rating agencies do not take kindly to bills being late even once. In the US you need to keep on the ball when payments are due all the time or your interest rates will increase and you will likely get hit with serious penalties.

Sometimes these interest rate increases are set in trigger clauses in credit card and mortgage agreements. There are also sometimes trigger clauses increasing interest rates and penalties in other loan agreements. The almighty credit agency reports can also be used by potential employers.

Many check credit reports to see whether the potential employee is a credit risk, and possibly another sort of risk. Paying bills on time is a crucial part of keeping above water in the United States.

This is also important for the overall economy. As the recent financial troubles have shown when a large number of home owners and others do not pay their credit bills (mortgages, etc.) on time the whole system can get hammered. The fact that these debt instruments were securitized by some sharpies on Wall Street and elsewhere, who pretty much made the possible risk of these loans disappear, is another sad story that led to the demise of Lehman Brothers, Bear Stearns, and, importantly, the demise of the stability of many families in the US and more.

The shock waves from the financial fiascos developed out of the most extensive housing bubble in the US history are still being felt. The debt problem the U.S. faces now is, in part, a result of the housing bubble.

But the biggest source of our federal deficits, which add up to more debt each time the government spends more than it takes in, can be found in entitlements. The biggest one is Medicare then there is Social Security, numerous income security programs, and then a list of smaller entitlements. All of these entitlements will balloon as the “baby boomers” move more and more into retirement. These and interest payments are considered mandatory payments.

These add up to the biggest part of the budget and are expected to grow to even larger parts of the budget in the future, unless something is done. Defense is just 20 percent of the federal budget. Health, Social Security and income security programs add up to 63 percent of the federal budget. Interest payments are 6 percent of the federal budget. Interest payments are a bit under 1/3 of defense, six times our foreign affairs budget, and 1.5 times our education budget.

Most of the cutting and pasting being discussed and argued about are cuts in the non-mandatory budgets, like education, defense, transportation, etc. There is some discussion on cutting back on Medicare and Social Security, but most politicians see cutting these as political disaster for them.

But these are the very programs that will balloon. This ballooning will either shove aside much of the discretionary budget or push even harder for the need to increase taxes vastly. Simple mathematics shows that.

Again, imbalanced budgets have made the national debt increase to the scary level of over $14.3 Trillion (with a T). $14.7 trillion is our debt ceiling. We have surpassed that already.

If you want to see how scary this really is take a look at the National Debt Clock, which also calculates in long term fiscal responsibilities into the debt amounts, and looks at the overall real debt responsibility if nothing changes: about $55 trillion as of today. See http://www.usdebtclock.org/ . Here is an interesting set of charts showing the history of our national debt and more:

http://home.adelphi.edu/sbloch/deficits.html .

The U.S. debt increased from $5.7 trillion in 2000 to over $14.7 trillion today. If one were to stack $14.7 trillion one dollar bills on top of each other that stack might go to the moon and back --- TWICE – depending on the length of the orbital diameter, etc. Wow. To bring it down to earth the world GDP is somewhere around $60 trillion, give a couple of trillion here and there for statistical discrepancies, etc. So the US national debt works out to about 25 percent of the world GDP. Now try to figure out how many thousands of lifetimes it would take count to 14.7 trillion. Count at one bill per second. Shocking, isn’t it.

The leadership on The Hill has a massive responsibility to get the budget in control and to pare down this debt over the next decades. And that is how long it will likely take to be quite realistic. Its immediate purpose is to make sure the U.S. does not go into default, which could have serious consequences both domestically and internationally.

However, I think too much emphasis has been put on this potential default. The real questions directed at the creditworthiness of the country should look at the longer term: how did we get into the position and how do we get out of it. Their long-term purpose is to get the federal fiscal houses in order. That is a much tougher chore.

If the leadership can somehow pull the rabbit out of the hat and increase the debt limit temporarily, which is what I expect them to do and to do it on time (but with more grievances across and within the political parties developed) then this really does not answer the question for debt holders and those thinking of buying US debt instruments.

The US still has the top credit rating on its debt, AAA. If the bickering and dysfunctional debates continue, which I also expect, then more questions will arise and we could be right back to where we are. The Treasury bill auction just after the decision has been made on the debt ceiling will determine a lot.

The budget needs to be gotten under control, but the big questions are where to cut, what to save, and what to add on. Add on? Yes, the infrastructure of the country is in disrepair in some places. It needs work.

One of my biggest concerns in all of this is that many important existing and potential future programs will get the axe and many people will be harmed in the process. Another is that the lobbyists will determine what gets cut and by how much rather than the American people.

This last one is almost a sure thing. But there is an underlying concern in all of this: even if the debt ceiling is raised and some budget deal is made there could be economic shock waves in the U.S. and abroad. The dysfunctional nature of decision making is now more important and more clearly seen by more people than ever before.

Those who will be hurt the most from the fallout from this will not be the Lamborghini set, but more likely the pickup truck set who work hard, yet are the most vulnerable to the effects of these larger issues, which they really have no control over. The next election cycle could be even more interesting than the last. And the results could be quite a surprise.

(Professor Paul J. Sullivan teaches at Georgetown University. He can be reached at: pjs57@georgetown.edu)

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