The Budget Crisis Could End In One Of Two Ways

Since publication of the first volume of Restoring Fiscal Sanity in 2004, a small group of budget experts from Brookings and several other think tanks have been predicting that the budget crisis, not yet fully realized in 2004, could end in either of two ways.

The Banana Republic Doomsday Scenario

First, in what might be called the Banana Republic doomsday scenario, a financial crisis of some sort could occur. One possibility, in an economic event not unlike a classic bank panic, is that investors who own the nation’s debt, about half of whom are foreigners, could lose faith in America’s ability to control its deficit, ramp up its evaluation of the risk involved in loaning their money to such an undisciplined nation, and demand higher interest payments before loaning the federal government more of their money. So great is the nation’s borrowing that even moderate rises in interest rates could precipitate a crisis because the nation would face three choices, all bad. The treasury could: borrow more money to finance the money it had already borrowed, thereby entering a death spiral; cut spending; or raise taxes.

The Chinese Water Torture Slow Crisis

Second, the nation could enter the Chinese water torture slow crisis in which spending on programs vital to the nation’s future are gradually starved. In this scenario, two additional villains accompany interest rates to produce the slow crisis. So much has been written about spending on Social Security and especially Medicare that most Americans must realize that these programs lie at the center of our debt problem. According to CBO, spending on Social Security, the major health programs, and net interest as a percentage of GDP will rise from 10.8 percent to 14.8 percent between 2013 and 2024. After that, the share of the nation’s economy consumed by the Big Three will continue to rise. And here’s an amazing fact: none of the Big Three even have a budget and the spending they entail almost never receives a direct vote in congress. If the federal budget were an airplane, the Big Three would be on automatic pilot as they head inexorably toward a mountain side at full speed.

The Big Three

With spending on the Big Three on automatic pilot, driving the nation’s indebtedness higher and higher, we don’t need to wait for the Banana Republican crisis to hit us to see the consequences of refusing to face budget facts. The Chinese Water Torture impacts are already here in the form of reduced spending on programs vital to the nation’s future. Here are three examples: children’s programs, the nation’s defense, and the National Institutes of Health:

  • Both the Urban Institute and First Focus have shown that spending on children has been in decline since 2010; in constant dollars, the First Focus estimate is that spending on children declined almost 14 percent between 2010 and 2014. The federal government has rapidly rising and uncontrolled spending on the elderly while cutting spending on and investments in the next generation. That’s a budget strategy followed by the blind;
  • Defense spending has declined about 20 percent since 2010 in constant dollars and is projected to decline further. In fact, if the caps on defense spending imposed by the Budget Control Act of 2011 are followed, by 2019 defense spending will be less than 2.5 percent of GDP, the lowest since we entered World War II. It’s a good thing there are no military threats headed our way from Russia, ISIS, al-Qaeda, Iran, North Korea, or China;
  • NIH, the greatest health research organization in history that brought the world a vaccine for HIV/AIDS, cures for various types of cancers, a cure for sickle cell disease, and countless other medical and behavioral therapies, is being forced to reduce the number of grants it provides to researchers and has actually terminated some ongoing research programs. No wonder. Between 1990 and 2003, the NIH budget increased by an average of roughly $1.5 billion a year; between 2004 and 2010, its rate of increase was cut by 2/3rds; for the last three years, the NIH budget has declined each year. Who knows the pains and sorrows that are being inflicted on humans in the U.S. and around the world because of the constrained NIH budget?

So the next time you read that the budget crisis, if it occurs at all, is many years in the future, ask the author to explain that to the 30,000 Americans who have the incurable disease ALS and are trying to understand why NIH cut its ALS research budget by about a third. We may be avoiding the Banana Republic budget threat for the time being, but the Chinese Water Torture slow crisis is here and having direct impacts on the nation.