The Path to Credibility and Fiscal Sustainability

The week began with the IMF’s judgment that the US lacks a “credible strategy” to stabilize its debt. As noted in the Financial Times (4/12/2011):

In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011, at a time when its economy was growing fast enough to reduce borrowing.

In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.

The IMF (and the FT) seems overly skeptical when considering the seriousness with which Washington views the issue of long-term fiscal responsibility. It was only last week that Congressman Paul Ryan released his Path to Prosperity, charting a course to fiscal stability that included no real cuts in defense spending and tax cuts (all of which might work if, as assumed, unemployment falls to historic lows).

Perhaps I am being too hard on the FT piece. It cited two pieces of good news: the continuing resolution to cut $38.5 billion in spending from the year’s budget and the President’s yet-to-be-delivered plans “to rein in America’s long-term deficits, which are driven by popular programmes like Medicare, Medicaid, and social security.”

Of course, as we have subsequently learned, the $38.5 billion in cuts was largely an exercise in misdirection.  The cuts will amount to $352 million. As reported by Tim Fernholz, National Journal, this constitutes “less than one-one hundredth of what both Republicans or Democrats have claimed.”

The astonishing result, according to CBO, is the result of several factors: increases in spending included in the deal, especially at the Defense Department; decisions to draw over half of the savings from recissions, cuts to reserve funds, and mandatory-spending programs; and writing off cuts from funding that might never have been spent.

Thankfully, the President was able to take the long-view in his Wednesday address, essentially quashing major reforms to key entitlements and relying instead on defense cuts and tax increases, along with a procedural fix. As recounted in the Washington Post, the President proposed

a “debt fail-safe trigger” that would cut spending across the board if lawmakers did not approve policies that would set the debt on a downward path by 2014. The trigger should spare Social Security, Medicare and programs for the poor, Obama said, and should raise taxes by cutting dozens of tax breaks that benefit people and corporations.

The details on spending cuts are supposed to be developed via “talks, to be led by Vice President Biden” which “would begin in early May, after lawmakers return from a two-week Easter break.” The Vice President signaled his commitment to this important new duty by sleeping through the President’s speech.

As Vice President Biden awoke from his slumber, Minority Leader Mitch McConnell and Speaker John Boehner rejected the call for higher taxes. Any such proposals, in Boehner’s words, are “a non-starter.”

So, beyond the courageous efforts to slash $352 million in spending cuts, we can assume that any broadly acceptable reforms will (1) take entitlement reform off the table; (2) take tax increases off the table; and (3) depend on some yet-to-be defined “debt fail-safe trigger” and the negotiating skills of the Vice President.

And the IMF says that the US lacks credibility?

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