Washington planting seeds for Detroit-like debt crisis

Posted by hpayne on February 27, 2013

Gov. Rick Snyder

A Detroit Financial Review Team has delivered the grim news that Detroit’s long-term liabilities are unsustainable and that the city’s $14 billion debt has delivered it to bankruptcy’s doorstep. With 30 percent of Detroit’s budget devoted to fixed costs like paying off long-term pension liabilities, Michigan’s largest metropolis has arrived at a cash crisis that threatens basic services. Washington’s own long-term liabilities bear a remarkable similarity to Motown with non-discretionary federal spending on entitlements and interest payments on $16 trillion in debt eating up nearly 30 percent of the budget.

So what might a federal financial review team say about Washington’s current fiscal structure? Actually, Washington got a similar review — if largely unreported in the media — just this January from the General Accounting Office. The verdict?

“Absent policy changes,” writes the GAO, “the federal government continues to face an unsustainable fiscal path. Under current policy (U.S. debt is) projected to grow to 78 percent in 2022, 145 percent in 2042, and 395 percent in 2087.”

Unsustainable. Detroit, meet Washington.

Like Motown decades ago, Washington is planting the seeds for Greece-like insolvency in the future. Yet while Detroit’s top pol, Dave Bing, at least recognizes his city’s disease, President Barack Obama blithely ignores the cliff on the horizon, scaremongering that a mere 2 percent sequester cut in federal fat would devastate the economy, starve children, create chaos in our airports and leave America defenseless.

The president’s denial is irresponsible in light of the GAO’s warnings.

America’s debt-to-GDP ratio in 2012 was a stunning 73 percent, a post-World War II record, and closing in on the Eurozone average of 88 percent. That is still well shy of Greece’s on-the-verge-of-default 160 percent, but Greece and Detroit are reminders of the dangers of kicking the can down the road. Currently, U.S. interest on its debt consumes “only” 6 percent of the budget (at $220 billion a year, that amounts to one-third of the defense budget) thanks to low interest rates. But, the GAO warns, the longer Washington ignores its spending crisis the higher that cost will go.

Indeed, in just 30 years, the U.S. will face debt-to-GDP ratios like Detroit/Greece, which means that U.S. debt will likely incur corresponding debt downgrades. Short-term debt in Greece today costs a stunning 23 percent in interest. In Detroit, few are willing to loan to the city at all. Who will loan the U.S. money in 2045?

“We’ll be spending over $1 trillion a year on interest by 2020. That’s $1 trillion we can’t spend to educate our kids or to replace our badly worn-out infrastructure,” says Erskine Bowles, Democratic co-chair of the deficit-reduction commission the president commissioned — and now ignores.

How deep is Washington’s hole? The GAO reports that just sustaining our current debt-to-GDP ratio will require that the government average surpluses equal to 2.7 percent of GDP over each of the next 75 years. To put that in perspective, the federal government has only run surpluses in four years — 1998-2001 — since 1970. This year, the deficit is 7 percent of GDP, down from record post-WW2 levels of 10 percent in 2010.

“This 75-year fiscal gap has important implications for the well-being of future generations,” warns the GAO in its typically sterile prose. “It is estimated that the magnitude of reforms necessary to close the 75-year fiscal gap increases by nearly 20 percent if action is delayed by 10 years and for more than 50 percent if action is delayed 20 years.”

Detroiters may wonder whyits leadership put the city on its current, unsustainablepath. In putting politics over fiscal sanity, the current White House is giving them a good example.

 

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