What The Debt Ceiling Deal Failed To Fix

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October 21, 2013 2:39pm NYSE:DIA NYSE:SPY

debt ceilingGarrett Baldwin: While everyone in Washington right now is patting themselves on the back in the wake of Wednesday’s debt ceiling deal, the reality is that it does little to address the nation’s deepest budget issues.


True, the Band-Aid agreement will fund the U.S. government through Jan. 15 and lift the debt limit through Feb. 7.

But all it means is that Congress has just 90 days to take meaningful action on the problems that led to the government shutdown and debt ceiling fight in the first place.

If it doesn’t, 2014 could be a very troubling year for both Washington and the U.S. economy.

Just look at these four disastrous problems the debt ceiling deal fails to fix…

What the Debt Ceiling Deal Failed to Fix

1) The National Debt Is Still Rising

Some commentators argued during the shutdown that having a debt ceiling makes no sense. Some even argued that a U.S. president should have unilateral power to raise the debt ceiling as needed.

But they seem to miss the point that the debt ceiling isn’t the problem – it’s the rising levels of debt that Congress continues to rack up at a record pace. Yes, we have to pay our bills, but every now and then we have to be reminded of just how out of control those bills have become. The limit on the borrowing authority acts as a reminder and should have spurred some conversation about how the United States will bring its long-term liabilities under control.

That didn’t happen this week.

The U.S. national debt is on pace to reach $20 trillion by the end of the decade, which means that if interest rates rise to 5%, the nation will need to pay $1 trillion a year just to service the debt.

The national debt has increased by 55% since President Obama took office. This translates into an unbelievable $123,000 per American worker, according to a recent Harvard University Institute of Politics study. This also translates into $53,000 in debt for every man, woman, and child in the country.

However, any time Congress attempts to take a bite out of the bloated budget, an interest group pops up and cries foul. Cutting budgets derived from other people’s money is much harder for career politicians than finding new ways to spend that money.

At the moment, there is no plan to curb spending, despite all of the claims about reduced deficits and budgets. The national debt will continue to climb, which means we’ll slam into the debt ceiling again in just three months.

But instead of directing his attention to the debt problems, President Obama has already said he wants to focus on immigration reform.

No wonder the Chinese ratings agency downgraded the United States this week.

But that’s just the start of the fiscal problems facing this country…

2) Never-Ending Gridlock

Congress just kicked the can down the road for a few months, meaning that in January we’re going to experience yet another debt ceiling fight.

The only difference is that the national debt will be higher, and any promises to cut long-term entitlement programs (the real source of economic insolvency in the United States) will be undermined by hyperbolic rhetoric designed to demonize anyone calling for reductions in Medicare or Medicaid.

And even if lawmakers do make a few token cuts to government spending, it will only encourage companies and contractors to put even greater effort toward grabbing a piece of a shrinking pie.

That inevitably will lead to more lobbying, which will only increase the partisan divide as bought-and-sold politicians fight for more of a smaller budget on behalf of their patrons.

3) Moving Money Around Is Not Economic Growth

We used to build things in this country… companies, bridges, skyscrapers, and industries…

Now we just reach into one another’s pocket and pretend that growth exists.

Government doesn’t create jobs, no matter how many times our elected leaders try to claim otherwise. The only way to pay off the debt over the long term is to take in more revenue as a result of increased economic development.

Unfortunately, the United States’ limited growth over the last few years has been driven heavily by government investment and spending – that is, using taxes and borrowed money to drive growth – as well as by the U.S. Federal Reserve‘s extraordinary attempts to pump money into the feeble recovery.

As a nation that imports far more than it exports, the United States and its citizenry continue to assume large debts in order to sustain its standard of living.

The United States would be better served by fixing its tax code, encouraging economic development, and embracing both new and old industries with job growth potential (see theshale boom).

Otherwise, the nation’s inability to produce and have robust domestic trade, exacerbated by its mounting debt, will start to affect national security and reduce global political leverage.

4) We Need to Fix the U.S. Labor Force

The United States can’t improve its financial condition with a lackluster workforce incapable of keeping up with major economic trends.

Yet that’s what we have now, and there is no plan in place to fix it.

Right now more than 3 million job openings exist in the United States. Each job would help build economic growth, provide tax revenue, and improve the lives of workers, coworkers, and families.

But many of these jobs go unfilled for a lack of qualified applicants, which ultimately is an indictment of the U.S. education system, which is failing to provide workers with the skills they need to compete in a 21st century global economy.

The United States spends more money on education than any other country on a per-student basis. But instead of coming up with ideas to make education a better match for the needs of the job market, Washington bureaucrats just want to spend even more money.

That’s the easy solution  until the costs become unsustainable.

We require total educational reform to improve the U.S. economy over the long-term.

The longer we wait to fix the education system, the longer this nation will find itself plagued with economic inequality, stagnation, and uncertainty.

Many of those who lack needed skills will have no choice but to seek aid from the government, further bloating the welfare state, dragging down economic growth, and adding to the national debt.

The bottom line: The U.S. government cannot keep borrowing and spending indefinitely. It’s just a matter of time before the nation either is forced to default on select debts or is forced to drastically inflate its currency to water down its obligations.

In a better world, Washington would just get out of the way and let business and industry grow across the nation, which would actually allow us to make some headway on the debts we’ve already run up.

Unfortunately, that won’t happen anytime soon – if ever.

Money MorningWritten By Garrett Baldwin From Money Morning

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