By August 2, the Congress and President will likely come up with a patchwork plan to cut spending and increase revenue over the next ten years, the debt-ceiling will be raised, and Armageddon will be averted-but only for a brief period.
Angst will begin anew next February when the President publishes his 2013 Budget, and bond rating agencies see quite plainly the United States does not have a credible plan to bring its growing debt under control.
Budget compromises now being discussed will pare back discretionary spending-something that can't be done very much a second time-and trim Medicare and Medicaid benefits. However, a few hundred billion a year in cuts won't change budget fundamentals.
Health care costs are too high and Americans are living longer. The cost of health care and Social Security benefits the federal government remains committed to providing will continue to grow faster than the economy and federal revenues-even if the President gets higher taxes on millionaires.
This situation is especially compelling now that Treasury Secretary Geithner tells us economic growth is likely to be closer to its current 2 percent rate than the 4 percent assumed by President Obama in his February 2011 budget and necessary to pull down unemployment to acceptable levels within a few years.
Since 2007, the deficit has swelled from $161 billion to about $1.6 trillion. Even with a few hundred billion annually in reduced spending and some new revenues, deficits in excess of $1 trillion each year can be expected indefinitely. Those projections will compel bond rating agencies to cut the U.S. credit rating from AAA, driving up borrowing costs for the federal and state governments, home buyers and private business. More spending cuts and taxes will be required to accommodate higher interest payments, and economic growth will slow even further.