The markets aren’t stupid. Washington thought it could fool Wall Street by enacting a debt deal consisting of the usual empty promise to cut spending. The collective intelligence of thousands of seasoned investors sees right through the smoke and mirrors to the fundamentals, and those are looking worse and worse these days.
The deal may have provided a dramatic last-minute save for America’s AAA credit rating, but it didn’t stop Moody's from lowering the outlook for the future to negative. Nor has Fitch, another of the big three ratings houses, ruled out slapping the “negative” label on its outlook later this month.
There’s little reason to be positive. The economy is perched on the edge of a double-dip recession, growth is far weaker than expected, and consumer spending is falling. The measure of the nation’s economic output sputtered to 0.4 percent in the first quarter and 1.3 percent in the second - far below the 3 percent growth needed just to maintain current employment levels. The stock market continues to tank, with the Dow plunging 512 points on Thursday.
Nothing in the debt deal is going to dig us out of this economic hole. Though pundits and politicians refer to the agreement’s cuts, they’re using the phony math that only passes muster within the Beltway. The “trillion-dollar cuts” won’t pay down one penny of national debt. In fact, it will add $2.4 trillion in new debt within the next year or two. The “cuts” only refer to base-line spending reductions, which are projected increases that aren’t as great as expected. In plain English, that means spending keeps going up. It can’t be otherwise because entitlement programs - the real drivers of debt - were kept off the table. Medicare, Medicaid and Social Security absorb 46 percent of primary federal spending, compared to 27 percent in 1975.
Not surprisingly, federal expenditures have grown apace. Excluding interest payments, outlays over the past four decades have historically averaged 18.5 percent of gross domestic product (GDP). The Congressional Budget Office (CBO) expects this spending to increase sharply to 26 percent by 2035 under its “alternative budget scenario” - the forecast model in which the CBO uses more realistic assumptions. That means one-quarter of the entire economic output of the country will be devoted to feeding Uncle Sam.
With the spending has come more borrowing. The CBO expects, under the alternative scenario, that debt held by the public will likely hit 90 percent of GDP in less than nine years. That is the danger point at which the debt burden begins to adversely impact GDP growth, according to a 2010 study by economists Carmen M. Reinhart, then at the University of Maryland, and Kenneth Rogoff of Harvard. The CBO estimates U.S. government debt could exceed its historical World War II high of 109 percent in 2023 - less than a dozen years away - with disastrous consequences for the economy.
Rather than coming to grips with the fact that the federal government is too big and spends too much, President Obama is once again repackaging the same-old Jimmy Carter-era spending programs that throw money down a hole. The only thing we got from dropping nearly $900 billion on the administration’s “stimulus” spending spree was enough debt to get a negative outlook from Moody's. Let’s not go there again.
Nita Ghei is a contributing Opinion writer for The Washington Times.