The Debt Ceiling Debacle Is Only The Beginning Of A Major Fiscal Crisis

Grace Wyler
If you think the current debt ceiling circus is bad, just wait for the real debt crisis.
Peter Coy at Businessweek writes today that the debate over raising the debt limit ignores just how ailing the nation's fiscal health really is.
Here are the highlights from his piece:

• The national debt is only a small part of U.S. liabilities. Failure to raise the debt ceiling would hurt the global financial system, but the threat is minimal compared to the real danger: Sharply rising healthcare costs combined with the aging baby-boomer generation.

• The U.S. is in danger of reaching a generational tipping point at which older Americans have the clout to vote themselves benefits that sap the strength of the younger generation—benefits that can never be repeated. We may already be there, if the vitriolic opposition to entitlement cuts is any indication.

• Even the $4 trillion "grand bargain" would not fix the nation's real fiscal problems. A June analysis by the Congressional Budget Office found that keeping the U.S. debt to GDP ratio consistent until 2085 would require cutting spending and/or raising revenue by 8.3% of GDP annually for the next 75 years. That's $15 trillion over the next decade.

• The fiscal gap—the net present value of all future expenses minus all future revenue—is $211 trillion, according to CBO calculations.

• The size of a deal is far more important than its composition i.e. spending vs. taxes. The reason so many plans aim for $4 trillion is because that's the amount that would, temporarily, stabilize the debt-to-GDP ratio.

• The nation's long-term budget problems are so big that some mixture of spending cuts and revenue increases will inevitably be necessary.

• In periods of slow demand, tax hikes are probably less "job-killing" than spending cuts. Cutting spending—by firing federal employees or canceling procurement, for example—removes demand from the economy dollar-for-dollar. A dollar tax hike, on the other hand, especially one aimed at upper incomes, cuts demand by less than a dollar.

There are ways to escape the impending crisis, Coy writes, if Washington can agree to use them. Ending tax breaks and eliminating incentives that are driving up healthcare costs would go far. Cutting Medicare and Social Security benefit formulas is also necessary.

Read more: http://www.businessinsider.com/the-debt-ceiling-debacle-is-only-the-beginning-of-a-major-fiscal-crisis-2011-7?utm_source=Triggermail&utm_medium=email&utm_term=Business%20Insider%20Select&utm_campaign=BI_Select_072811#ixzz1TRHa8fmu