Debt is still the problem, spending is the cause
This morning's GDP report caused quite a stir among Washington economic press and policy wonks. But that's not the only recent economic data, and it's essential that we remember the big picture. Yesterday we saw very troubling consumer confidence numbers. Today private sector employment was up and GDP was a mix of a bad top line and some stronger points inside.
But what's behind all of this data is the debt. Every time. Higher debt leads to slower growth. Carmen Reinhart and Kenneth Rogoff estimate that when debt exceeds 90 percent of GDP, countries grow 1.2 percent lower than they otherwise would. We’ve been above that since 2010. Slower growth means fewer jobs, and lower incomes, which depresses confidence. For too long the economy has been recovering too slowly - hovering around 2 percent - leaving it vulnerable and unable to insulate against shock. Why? Because Washington refuses to deal with the debt.
The Washington Post's Ezra Klein is right when he says that the fiscal cliff deal "did very little for the deficit even as it sharply raised taxes." Exactly. Raising taxes is not going to solve the debt crisis, because the debt crisis is ultimately the result of out-of-control spending. But not just any spending, mandatory spending, which will eclipse 64 percent of our overall spending by 2022 if left unaddressed. Not to mention that the Medicare and Social Security programs themselves are going bankrupt. As Douglas Holtz-Eakin explains "this isn't about austerity, austerity isn't the goal, mandatory reforms and sustainable growth is the goal."
Even more troubling, these same problems are happening on a household level. Huffington Post reports that "nearly 44 percent of American households don't have enough savings to cover their basic expenses for three months in the event of a financial emergency like losing a job or paying for unexpected medical care, according to a recent report from the Corporation for Enterprise Development."
Living on the edge of the next fiscal cliff or unforeseen economic shock guarantees continued troubling economic reports. Taxes can’t move us away from here. The only way to improve confidence, lower the debt, and strengthen growth is through long-term deficit reduction. And that resides in mandatory spending reforms.