Erskine Bowles, a true Southern gentleman and co-chairman of President Barack Obama’s erstwhile budget-deficit commission, came to New York City from his home in North Carolina the other night to talk sense about the nation’s perilous fiscal condition.
“I think today we face the most predictable economic crisis in history,” he told an audience on April 24 at the Council on Foreign Relations -- an audience that might actually be able to help do something about the problem. “Fortunately, I think it’s also the most avoidable. I think it’s clear, if you do simple arithmetic, that the fiscal path that the nation is on is simply not sustainable.”
Bowles, a Democrat, then laid on the crowd some pretty simple, but devastating, arithmetic. He explained that 100 percent of the tax revenue that entered the Treasury in 2011 went out the door to pay for mandatory spending -- such as Medicare, Medicaid and Social Security -- and to pay the interest on our staggering $15.6 trillion national debt.
That means that every single dollar we spent on everything else, including two wars, national defense, homeland security, education, infrastructure, high-value-added research and the like, was borrowed. “And,” he warned, “half of it was borrowed from foreign countries. And that is a formula for failure in anybody’s book.”
He said the U.S. is now paying $250 billion a year in interest on the debt, and that is only because, mercifully, interest rates are at historic lows. That’s chiefly because investors are more worried about the risk of default by European nations, and because the Fed is doing everything in its power to keep interest rates low. “It’s because we’re the best-looking horse in the glue factory,” he said.
If interest rates were normalized, Bowles said, the annual bill would be $600 billion a year. “We’ll be spending over $1 trillion on interest alone before you know it,” he said. To nervous laughter, he offered the example of the country’s obligation, by treaty, to defend Taiwan in the event that China decides to invade the island. “There’s only one problem with that,” he said. “We’ll have to borrow the money from China to do it.”
But wait, it gets worse. He reminded the audience of the numerous “cliffs” the country faces at the end of 2012 when the George W. Bush tax cuts expire: More than $1.1 trillion will be cut from the budget, about half of which will come from defense because of the infamous “sequester” of last year; the payroll tax cut will expire, as will the “patch” in the alternate minimum tax. “If you add all those up,” he said, “it’s probably $7 trillion worth of economic events that are going to occur in December. And there’s been little to no planning for that.”
It is every bit as criminally irresponsible for Congress to fail to address this looming crisis as it was for Jimmy Cayne at Bear Stearns, Dick Fuld at Lehman Brothers and Martin Sullivan at AIG to ignore the financial problems at their firms in 2008.
Interestingly, Bowles remains optimistic that the circumstances are so dire that Congress will have to act, although it probably won’t happen until the seven weeks between Election Day and the end of the year. “We have to,” he said. “We’ve simply made promises that we can’t keep.”
The big driver is clear, he said: “We have a health-care system that’s absolutely crazy. We spend twice as much as any other developed country in the world on health care, whether you talk about it as a percent of GDP or on a per-capita basis. And that might be OK if we could afford it, and it might be OK if the outcomes were any good. But if you look at most outcome measures, we rank somewhere between 25th and 50th in such important measures as infant mortality and preventable deaths and life expectancy. And anybody who thinks those 50 million people who don’t have health-care insurance don’t get health care, you’re just wrong. They get health care, they just get it at the emergency room at five to seven times the cost it would be in a doctor’s office. And that cost doesn’t go away, it gets cost-shifted.”
Despite the March 28 defeat of a budget based on the Simpson-Bowles plan by a House vote of 382 to 38, Bowles believes a version will have to get adopted before we fall off the cliff at the end of year. He has spent much of the last year putting the plan into legislative language that has increased its page count to more than 800 pages, from 67, and has put real numbers to the various proposals.
“It’s a nightmare to do, but it absolutely is necessary,” he said. He added that Simpson-Bowles is the “gold standard” for figuring a way out of our fiscal mess, with its combination of revenue increases, spending cuts and tax reform. He allowed that “most people” think there will be agreement on reducing the deficit by $4 trillion, the “minimum amount you need to reduce the deficit to stabilize the debt and get it on a downward path as a percent of GDP.”
Without serious debt reduction, it won’t take much of an increase in interest rates to create a fiscal crisis for the country the likes of which only those who lived through the Great Depression can recall. Once interest rates reach a level that reflects the genuine risk inherent in our ongoing fiscal mismanagement, and debt-service eats up more and more of a shrinking pie, the financial crisis we just lived through (and are still living through) will seem like a sideshow.
“Deficits are truly like a cancer,” Bowles said, “and over time they are going to destroy our country from within.”
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
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