America’s Ticking Debt Bomb
The following piece is excerpted and adapted from U.S. Senator Tom Coburn’s new book The Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America
The Senate Finance Committee gathered for a private session. The world economy seemed to be unraveling, unemployment was rampant, and our debt was already slowing our economy.
The end-of-the-year meeting was held to discuss how to handle what had become the annual holiday train wreck in Washington when important bills were put off until the last minute. Not long after Chairman Max Baucus (D-MT) began to go through the agenda, the meeting turned into an intervention – with ourselves.
Senator Olympia Snowe (R-ME) had enough of the delays. “Are we even going to fix this?” she asked. “We should have this meeting in January. We’ve known all this was coming. The committees of jurisdiction should be doing these. Are we just going to keep doing this year and after, in lurches? It’s preposterous. We should use this occasion to do something right so we aren’t embarrassed we wasted the last two years of America’s life.”
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It was an important point. The Senate Finance Committee is in many ways the committee of jurisdiction in the Senate. We oversaw the largest portions of the budget – health care, entitlements, and taxes – in the wealthiest nation in the history of the world. Any solutions would come through us and should begin with us.
“We have to do something, not just say we are doing something,” Senator Mike Enzi (R-WY) said.
“I’d like us to be senators again and do what we are supposed to be doing. Instead we keep kicking the can down the road,” Baucus agreed.
Senator Kent Conrad (D-ND) leaned in and whispered to me, “This is a very critical meeting.”
It seemed the committee was waking up and accepting responsibility.
Senator Ron Wyden (D-OR) added, “If this committee really came together I believe we could do tax reform.”
He was right. The fact that we had not done tax reform in 25 years – since 1986 – was a pox on both houses. Neither party wanted to let go of their favorite loopholes, exemptions, and deductions, even though doing so could lower rates and spur tremendous economic growth and job creation. Each side had a schizophrenic approach to tax reform that said, “Support simplification, give me complexity.”
I added, “Most of us know what needs to be done, and significant reform on entitlements is needed. We need to reform the code, lower rates, generate revenue, and address our deficit.”
Our discussion showed that many in Congress – and the administration – understood the severity of our problem. We all knew that we could not continue to borrow more than 40 cents for every dollar we spent. Yet, few were willing to risk their political careers to solve the problem. Most politicians were content to sit in their partisan bunkers and cling to the illusion that they were holding a line, when the reality was, there were no more lines left to hold. Both parties had betrayed their core beliefs and positions. We were under siege and surrounded on all sides, not by a foreign army but by foreign creditors …
Facing the Facts
America today faces one of the greatest threats to its existence since our founding. The threat does not come from any foreign army or terrorist network, but from our own government and its unsustainable spending. If we don’t change course in the near future – most likely the next two years – America as we’ve known it could soon be a shell of its former self.
We could face a sudden economic collapse worse than the Great Depression, or we could enter an era of managed decline and waning influence.
What is certain is that maintaining our present course is a mathematical impossibility. If we ignore this problem, we will condemn future generations to a lower standard of living with less freedom and less opportunity. Sooner or later, our “debt bomb” will go off.
Admiral Mike Mullen, former Chairman of the Joint Chiefs of Staff, is not exaggerating when he calls our debt our greatest national security threat. What makes his statement so remarkable is that for most of America’s history, threats to our national security have been described in military terms: the size of opposing armies, the number of ICBMs, and—in a post-9/11 world—the determination of terrorists to kill civilians. Our military leaders, of all people, have no reason to downplay such threats, so Admiral Mullen’s decision to identify America’s greatest vulnerability in economic rather than military terms should be a wake-up call for every American.
If Tom Clancy could capture our moment, he might call it “Red Ink Rising.” In a very real sense, the threat from borrowing from countries like China is greater than the threat of war with China. Sooner rather than later, a major fund or government will just decide one day that buying U.S. debt is a bad bet. And with one gust of wind, the house of cards will come crashing down.
We need to face the facts. America is already bankrupt. We may not believe it. We may not yet feel its full effects. But we are effectively bankrupt. Our debt now exceeds the size of our entire economy. Our payments on our obligations – our unfunded liabilities – exceed our income as far as the eye can see. No amount of obtainable growth or tax revenue will be enough. There simply is no possible way we can finance our long-term liabilities without fundamentally reimagining what government can do in the twenty-first century.
If current patterns hold, we’ll hear increasingly dire warnings and more earnest promises to do something, but no one will act decisively until we experience more economic pain.
A debt crisis would likely move through the following stages:
Stage 1: Congress tries to maintain the status quo on spending and entitlements
Stage 2: The United States faces additional credit downgrades
Stage 3: Interest rates markedly increase, harming consumers and sending interest payments on the national debt soaring
Stage 4: Inflation soars, and the value of the dollar declines
In this final stage borrowing enough money to fund our military and other programs will become much more expensive. Because we will be spending more on interest payments, it will be virtually impossible to balance our budget with spending cuts and revenue increases. The hole will be too deep and the sides too steep to climb out.
Meanwhile, the so-called solutions government would turn to at this point would make the problem much worse. Politicians would essentially try to save themselves by destroying the middle class with a tactic leading economists Carmen Reinhart and Kenneth Rogoff call “financial repression.” Financial repression happens when, to solve a debt crisis, the government uses tools that rob working families. One of the time-honored tools of financial repression is the debasement (devaluing) of currency and inflation.
Inflation will make government debt seem smaller by shrinking the value of the dollar. Yet, for individual Americans, inflation will be an insidious hidden tax increase that will make everything you buy more expensive, and everything you own worth less. If our government tries to inflate its way out of a debt crisis, much of your life savings will be wiped out.
Meanwhile, other nations will see this as their chance to make what could be a decisive move against the dollar and the value of the dollar would fall even further.
Finally, the bottom would fall out of the middle class. Unemployment would soar, while the cost of living would increase. Real wage growth has already been stagnant in recent years, and it will be the middle class and lower-income families that pay the price for Washington’s refusal to act.
If Admiral Mullen is correct that our debt is our greatest national security threat, doing nothing is a recipe for mutually assured destruction. The reality is doing nothing to solve the problem is both a tax increase and a benefit cut for seniors and the poor. Doing nothing violates the core principles of both parties, while solving the problem is consistent with those values. Doing nothing is the real betrayal and the heresy …
We Can’t Wait on a Solution
The big question facing America now, and in the foreseeable future, is not who is going to win the next election but whether we are going to defuse a debt bomb that has put our very survival at risk.
From my vantage point, having spent hundreds of hours with people who have a sacred responsibility to solve this problem – from the president to congressional leaders – I believe a consensus for a solution already exists in the country and in Washington.
But a real solution will never fit into an election-year strategy. In Washington, the moment to do what is right is never today. It is always a mirage just beyond the horizon of the next election. It comes down to a question of political will and courage. Will we be career politicians, or will we be statesmen?
The good news is, there is a growing cadre of members of Congress in Washington who are ready to go into battle and to lay down their political lives for their country. With a little leadership and courage, we can get there sooner than you think …