Avoiding the Credit Cliff
As our debt is set to overwhelm the economy, now is the time to act By Paul Ryan
The shadow of an oncoming debt crisis is hindering job growth today and threatening our fiscal and economic future. The latest warning came today from “The Long-Term Budget Outlook,” an annual report from the Congressional Budget Office (CBO) which details the state of the nation’s finances. This year’s news is grim. We are on the verge of leaving the next generation with an unsustainable debt burden and a less prosperous nation.
According to economists Kenneth Rogoff and Carmen Reinhart, who have studied sovereign debt extensively, debt-to-GDP ratios of over 90 percent are associated with lower economic growth and increased risk of a severe debt crisis. According to the CBO, total U.S. debt will race across that tipping point and surpass 100 percent of the economy by the end of this year.
President Obama has asked Congress to raise the statutory debt ceiling, which sets a legal limit on federal borrowing. But this debt ceiling should not be confused with the bigger threat — a credit cliff, beyond which global confidence in the U.S. government would enter into a freefall.
The CBO’s warning on this point is clear: “Growing debt . . . would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.” We are rapidly approaching the cliff’s edge, and there are three main reasons that a course correction cannot be delayed.
The prospect of a debt crisis tomorrow is contributing to the jobs crisis today. The refusal of many in Washington to advance real solutions for avoiding this crisis isn’t just threatening the future of our economy — it is hurting our economy today. The problem is simple: Businesses are holding back on hiring and investment today partly because they are worried that we are headed for a future of permanently higher taxes, much higher interest rates, severe currency devaluation, or all three.
If we wait until it’s too late, the consequences would be devastating. In the event of a serious crisis, no entity on the planet would be large enough to bail out the U.S. government. Families and businesses would bear the brunt of the crisis in full. Much higher interest rates on government debt would translate into much higher interest rates on all kinds of consumer debt. Higher borrowing costs would also have a chilling effect on business investment, because companies would face a much higher hurdle for profitability on potential expansion plans. And if the nation ultimately experienced a panicked run on its debt, it would be forced to make immediate and painful fiscal adjustments (like the austerity program that has provoked riots in Greece). This would mean massive tax increases on working families and steep benefit cuts that hit our most vulnerable citizens the hardest.
Each day Washington fails to act, policymakers increase the risk of a sudden crisis. Advocates of more deficit spending, and those who counsel delay in the face of mounting debt, point to low yields on U.S. bonds as evidence that the market isn’t worried about our long-term budget problems. But credit-rating agencies and major bond buyers have expressed growing concerns about our fiscal trajectory, with Standard & Poor’s issuing another warning just this week. Moreover, as the latest news from Europe shows, such doubts can intensify quickly, causing investor sentiment to turn — and interest rates to spike — almost overnight. Our government’s troubling reliance on foreign creditors has left us especially vulnerable to an abrupt loss of confidence.
Responsible leadership is required to address both the statutory debt ceiling and the credit cliff on the horizon. House Republicans have offered a simple proposition on the debt ceiling: For every dollar we raise the debt ceiling, we should cut more than a dollar in spending.
But the greater challenge remains avoiding the credit cliff. To that end, the House of Representatives passed a budget, “The Path to Prosperity,” which would put us on a path to balanced budgets and save critical programs such as Medicare — without resorting to growth-killing tax hikes. Meanwhile, the president has yet to put forward a serious budget, and it has been 784 days since the Senate passed any budget at all.
Despite the current leadership deficit in Washington, I am optimistic that we will avoid the most predictable crisis in our history. Americans are well-aware of the dangers of out-of-control spending and rising debt, and they have been for some time. They are demanding leaders who will be honest about the solutions required.
As Warren Buffett said, “There’s no way you can bet against America and win.” Investors know this instinctively, which is why markets are still giving us time to get this right. But our window of opportunity is closing quickly. Let’s work together now, before it’s too late, to put America’s budget on a sustainable path, grow the economy, and leave the next generation with a better country than the one we inherited.
— Rep. Paul Ryan represents Wisconsin’s 1st congressional district.
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