Deal Averts Default, But Doesn't Fix Debt Problems

Aug 3, 2011
Originally published on August 3, 2011 7:45 am

The bill passed Tuesday to raise the nation's debt limit and avoid default includes as much as $2.4 trillion in deficit reduction over the next decade.

"It's an important first step to ensuring that as a nation we live within our means," President Obama said.

The deal was hard-fought, with cuts some say will be painful, but experts say it doesn't come close to fixing the country's debt problems.

"It sounds good. It sounds big," says Diane Lim Rogers, chief economist at the Concord Coalition, a nonpartisan group that pushes for deficit reduction. "Unfortunately our fiscal challenges are much greater than that."

Rogers says this deal doesn't cut the nation's debt. Not even close. It just slows the growth. Even with all these cuts, the government will still spend more each year than it brings in, she says. Much more.

Balance Rising

"All we've done with this debt-limit deal is committed to a plan that says, 'OK, we won't put quite so many new charges on our credit card each month,'" Rogers says.

The national debt is the total amount the U.S. owes — currently about $14.5 trillion. In credit-card terms, the debt is the outstanding balance.

The deficit is the difference between what the government spends each year and what it brings in. It's like the new charges listed on the bill. This year's deficit is expected to be about $1.4 trillion.

"[The deal] doesn't mean we've stopped using the credit card," Rogers says. "It doesn't mean we are even paying down our credit-card balance. It certainly doesn't mean we've cut up our credit card."

There are a couple reasons why this is a problem: The more the federal debt grows, the more interest the U.S. has to pay on that debt. Eventually it starts crowding out other priorities. Even with this deal, Rogers says, the nation's deficits are so big, they're outpacing economic growth. This means the debt compared to the size of the economy will continue growing.

Rogers calls that "a recipe for an unsustainable situation."

Difficult Choices Needed Ahead

As part of the deal, the deficit trims come in two phases. Congress has agreed on nearly $1 trillion in discretionary and defense-spending cuts. A so-called supercommittee of Congress is supposed to come up with the other $1.5 trillion during the next few months.

Marc Goldwein, policy director for the bipartisan Committee for a Responsible Federal Budget, says Congress should be aiming higher.

"What they should be shooting for is about double their $1.5 trillion goal," Goldwein says. "They should be shooting for more like $3 trillion."

But to get there, Goldwein says, members of the supercommittee would have to do things that would anger partisans on both sides. For Democrats it would mean accepting tough changes to Medicare and Social Security.

That would include "some painful adjustments like raising the retirement age or reducing benefits for high earners or increasing the amount of income subject to taxation," Goldwein says.

Republicans would have to accept revenue increases.

"We must reform the tax code," he says. "We need to get rid of all these deductions, credits, exclusions that really just riddle the tax code and cost us a trillion-plus a year."

But for every tax break and every government program, there is a constituency that doesn't want it to change. That's why it was so hard for Congress to settle on the deal it ended up with, and why it will be even harder to come up with a plan that would put a stop to that rising balance on the nation's credit card.

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RENEE MONTAGNE, host:

It's MORNING EDITION from NPR News. I'm Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep.

In the coming days, we'll see if we face consequences after Congress pushed the nation to the brink of failing to pay its bills.

MONTAGNE: Stock prices that started sliding during the crisis have continued falling this week. Investors are responding to bad economic news.

INSKEEP: And then there's the compromise that went along with this week's increase in federal borrowing authority. The deal is designed to scale back federal spending over a decade. Yet the long-term projections for the federal deficit are much larger than the deal.

NPR's Tamara Keith reports.

TAMARA KEITH: President Obama went to the Rose Garden yesterday to celebrate the deal - well, not exactly celebrate but to mark the culmination of weeks of battles.

President BARACK OBAMA: This compromise guarantees more than $2 trillion in deficit reduction. It's an important first step to insuring that as a nation we live within our means.

KEITH: But among Washington's professional deficit watchers, this deal wasn't exactly a cork-popping moment. Diane Lim Rogers is the chief economist at the Concord Coalition, a non-partisan group that pushes for deficit reduction.

Ms. DIANE LIM ROGERS (Chief Economist, Concord Coalition): It sounds good. It sounds big, but unfortunately our fiscal challenges are much greater than that.

KEITH: What she's getting at here is this deal doesn't cut the nation's debt. Not even close. It just slows the growth. Even with all these cuts, the government will still spend more each year than it's bringing in - much more.

Ms. ROGERS: All we've done with this debt limit deal is committed to a plan that says, okay, we won't put quite so many new charges on our credit card each month.

KEITH: Before we go any further, a couple of quick definitions. The national debt is the total amount the U.S. owes. It's currently about 14 and a half trillion dollars. So if we're looking at the nation's credit card bill, then the debt is the outstanding balance. The deficit is the difference between what the government spends each year and what it brings in. It's like the new charges listed on the bill. This year's deficit is expected to be about $1.4 trillion.

Rogers says this deal doesn't do anything to pay down the debt or stop its growth. And it only does a little bit to the deficit.

Ms. ROGERS: It doesn't mean we've stopped using the credit card. It doesn't mean we are even paying down our credit card balance. It certainly doesn't mean we've cut up our credit card.

KEITH: There are a couple of reasons why this is a problem. The more the federal debt grows, the more interest we have to pay on that debt to the point where it starts crowding out other priorities. And even with this deal, Rogers says our deficits are so big, they're outpacing economic growth, which means the debt compared to the size of the economy will continue growing.

Ms. ROGERS: Which is a recipe for an unsustainable situation.

Mr. MARC GOLDWEIN (Committee for a Responsible Federal Budget): As Republican Senator Lindsey Graham said, we were running to oblivion before. Now maybe we're just walking to it.

KEITH: Marc Goldwein is policy director for the Committee for a Responsible Federal Budget, a bipartisan group calling for - you've got it - deficit reduction.

As part of the deal, the deficit trims come in two phases. Congress has agreed on nearly a trillion in discretionary and defense spending cuts. A so-called super-committee of Congress is supposed to come up with the other one and a half trillion in the next few months.

Goldwein says that super-committee should aim higher.

Mr. GOLDWEIN: What they should be shooting for is about double their $1.5 trillion goal. They should be shooting for more like three trillion.

KEITH: But to get there, Goldwein says members of the committee would have to do things that will make partisans on both sides mad. For Democrats it would mean accepting tough changes to Medicare and Social Security.

Mr. GOLDWEIN: We need to be looking seriously at the entitlements. That means making Social Security sound and solvent for the next 75 years, through some painful adjustments like raising the retirement age or reducing benefits for high earners, or increasing the amount of income subject to taxation.

KRULWICH: And he says Republicans would have to accept revenue increases a.k.a., taxes.

Mr. GOLDWEIN: We must reform the tax code. We need to get rid of all these deductions, credits, exclusions that really just riddle the tax code and cost us a trillion dollars-plus a year.

KEITH: But for every tax break and every government program, there's a constituency that doesn't want it to change. Which explains why it was so hard for Congress to settle on the deal it ended up with, and why it will be even harder to come up with a plan that would put a stop to that rising balance on the nation's credit card.

Tamara Keith, NPR News, Washington. Transcript provided by NPR, Copyright NPR.