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About that Debt Ceiling Deal and Those Spending Cuts

Why the S&P downgrade could be just the beginning

Adam Summers
August 17, 2011

Washington politicians were shocked--shocked!--when Standard & Poor's had the gall to downgrade the United States' credit rating a single notch from AAA to AA+. What temerity it had to suggest that the nation cannot continue to spend trillions more dollars than it takes in revenues.

The politicians are right to be upset with the rating, however, which is hardly accurate. If a true accounting of the U.S.'s debt were to be performed, the rating would be revealed as "junk status."

Naturally, the government chose to ignore the problem and shoot the messenger. The Obama administration blamed the Tea Party (without whose efforts, the spending would have been even greater) and a Senate panel is investigating S&P's downgrade decision. But, if anything, the rating agencies are a couple steps behind, as they were when they largely missed the housing and financial crisis, and things are worse than their ratings reflect.

"There are three kinds of lies: lies, damned lies, and statistics," Mark Twain famously said. He also said, "Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself." The nineteenth and early twentieth century author and humorist's observations could just as well have been made today in light of the recent--and ongoing--national debt debate.

Only in government could spending trillions of dollars you don't have--and still won't have in the near future--be considered a drastic austerity measure. The recent debt limit deal calls for capping spending by $2.1 trillion to $2.4 trillion less than previous projections. Despite many wailings, particularly on the left side of the political aisle, that this represents drastic "cuts," the truth is that it is nothing of the sort.

According to Congressional Budget Office projections from earlier this year (see Summary Table 1 on page XII of the CBO report here), the United States is expected to spend $7 trillion more than it takes in over the next ten years. So this "bold" deal that many Republicans (the Tea Party faction excluded) are hailing as a significant reduction in the size of government, and Democrats are bemoaning as draconian cuts in government services, actually amounts to the government agreeing to spend adding only about $5 trillion, instead of $7 trillion, to its $14.6 trillion national debt over the next decade. For this, members of Congress are breaking their arms patting themselves on their backs for the historic deal they have made.

So the "cuts" are not actual cuts at all since spending keeps going up--significantly--but rather reductions in the rate of growth that Congress hoped to achieve before. It is hard to believe that they can get away with this but this is how government budgeting is done. The media rarely call them on it and the public mistakes these government spending "cuts" with actual cuts.

It is as if you earn a salary $50,000 a year. You wish and hope and pray that you'll get a $5,000 raise at the end of the year. When your actual raise is only $3,000 you huff and puff that you got a $2,000 salary "cut"!

A YouTube video posted recently by the Libertarian Party illustrates the point well. One man says to another, "I just saved $350,000."

Second man: "How?"

First man: "By not buying a Ferrari in 2016."

Second man: "Nice."

To make matters worse, the 10-year plan is backloaded so that about 70% of the $917 billion in "guaranteed" discretionary reductions don't take place until 2017 or later (see Table 1 on page 9 of the CBO analysis here). And since future Congresses can simply ignore the deal, the only thing that is really guaranteed is the measly $21 billion in reductions for 2012. As one analyst on a recent CNBC program noted, in a budget of $3.7 trillion, $21 billion is a "rounding error."

It is clear that Congress is not the least bit serious about trying to rein in its profligate spending. It is long past time for the U.S. to get its fiscal house in order. Barring a massive change in direction politically and real cuts to the size and scope of government, the S&P downgrade is just the beginning.

Adam B. Summers is a policy analyst at the Reason Foundation.


Adam Summers is Senior Policy Analyst


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