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After super-committee’s failure the cost of inaction increases

By Congresswoman Virginia Foxx

Just before Thanksgiving the congressional “super-committee” announced it was unable to come up with a package of deficit reductions totaling $1.2 trillion.  This is a sad commentary on Washington, DC’s addiction to over-spending.  After all, $1.2 trillion seems like a lot of money, but in reality amounts to less than one year’s worth of federal government over-spending at the going rate.

Apparently Congress needs more than a so-called “super-committee” to get the federal government’s finances in order.  Perhaps it’s time for a lesson in the consequences of unchecked fiscal irresponsibility.  Consider the case of European profligacy. 

For years, decades even, many European nations piled up deficits that would make a drunken sailor blush.  Few governments restrained their appetite for spending and soon many national balance sheets were written in red ink. 

Now the bills are coming due.  

Over the course of this year the Euro-zone sovereign debt crisis has spiraled out of control, pulling more and more nations into its chaotic orbit.   As a result we’ve seen governments toppled in Greece and Italy.  It’s gotten so bad, that the EU created a sort of bailout fund of its own. This time instead of bailing out banks, it’s bailing out entire nations.  How did this happen?

In simple terms, over-spending finally caught up to the Europe’s spendthrifts.  Take for instance, one common measure of the credit-worthiness, and by extension the frugality of, a nation: the ratio between the size of its economy and its national debt. 

In Greece, now the poster child for insane amounts of deficit spending, the national debt is 150 percent of the size of its economy.   As investors watched Greece’s debt balloon they became less and less willing to lend to Greece at pitifully low interest rates.  And so Greece got a twofer.  Not only were its debt interest payments increasingly enormous, but the interest rate on new or refinanced debt spiraled higher and higher.  Eventually it became too much and Greece came hat in hand for a bailout.

In Portugal, where the national debt to economy ratio was a more modest 100 percent, the government was also forced to tap the EU’s bailout fund as its interest rates grew unsustainable.  In Ireland, with a 114 percent debt to economy ratio, the same thing happened.

Then in November the formerly unthinkable occurred.  The interest rate at which Italy, Europe’s third-largest economy, could borrow money for up to 10 years topped 7.5 percent.  This was the highest rate Italy had paid since the advent of the euro.  This particular rate is considered a tipping point, since Greece, Ireland and Portugal all needed bailouts after their borrowing rates crossed that threshold and effectively crushed their ability to finance their debt.

As a condition for the bailouts they received, these European nations had their government budgets dictated to them by EU and international organizations.  In effect, they ceded part of their sovereignty as a price for their years of fiscal mismanagement.

Why does this matter for the U.S.? 

Well, in an ominous sign, this year the U.S. national debt topped 100 percent of our economy for the first time since the record-breaking borrowing of World War II.

Despite our high level of debt, many investors are willing to lend to the U.S. government at record low interest rates.  For now, U.S. bonds are seen as a safe haven in the midst of international financial turmoil.  But that will change if the federal government doesn’t get its finances in order. 

At the end of November one of the three major credit rating agencies, Fitch Ratings, lowered the U.S. credit outlook to negative.  This signaled that unless the federal government makes real changes to it’s budget the U.S. credit rating will be downgraded, putting us on the road to higher interest rates and financial turmoil.

The federal government’s 10-year borrowing rate has hovered around 2 percent for months.  Even with these record low rates we still paid $454 billion in interest on the national debt in fiscal year 2011.  What happens if creditors are no longer willing to lend to the U.S. at bargain basement rates?  What if interest rates double to 4 percent or triple to 6 percent?

If interest costs on the debt doubled or tripled (which would still be less than Italy was forced to pay at the end of November), they would account for about a third of the total federal budget—about as much as Social Security and Medicare combined. 

There isn’t really an easy way out at this point.  Basically, there are two paths forward: there’s a hard way and a really hard way.  We can act now and make the difficult choices to reduce spending and our national debt.  Or we can do nothing until we find ourselves at the mercy of our creditors and begging for a bailout like many of the nations of Europe. 

Earlier this year I voted for and House Republicans passed a budget that reduced spending by $6.2 trillion over 10 years.  That’s five times the amount the super-committee failed to find in deficit reductions.  As is often the case, this budget stalled in the Senate—which hasn’t passed a budget in about 950 days.

Then in November I voted for a balanced budget amendment to the Constitution.  While it failed to garner the necessary 2/3 supermajority for passage, it did send a signal that many in Congress are serious about ending the era of overspending. 

These are tough pills to swallow. But the alternative of waiting for a true crisis to force profoundly painful changes upon us is even worse.  That’s why Congress needs to act decisively today to rein in spending before we find ourselves next in line for a fiscal reckoning of the sort that is currently socking the Europeans.  After all, who would be able to bail us out?