The arrival of budget season has brought debt panic back to the Beltway. But President Obama threw cold water on the matter last week, telling ABC’s George Stephanopoulos that the United States does not face “immediate crisis in terms of debt.” And this morning, House Speaker John Boehner (R-OH) essentially told ABC’s Martha Raddatz he agrees with Obama, calling the debt crisis “looming,” but not “immediate.”

“We do not have an immediate debt crisis,” Boehner said on ABC News’s “This Week With George Stephanopoulos.” “But we all know that we have one looming. And we have — one looming — because we have entitlement programs that are not sustainable in their current form. They’re gonna go bankrupt.” [...]

“[President Obama's] point, as he went on to say in that interview, is that we don’t — we don’t really need to do anything at this point. And I would argue that we do need to do something,” said the House speaker.

Debt is already projected to remain at or below its current share of the economy for the next decade, and it’s good that Boehner is standing in agreement with the president on that point.

Unfortunately, the budget the House Republicans just released does not reflect this realization. It cuts all spending that isn’t Medicare, Social Security, or the military down to near-historic lows over the next ten years. America’s economy remains in the doldrums, leaving the unemployment rate at 7.7 percent (it has never been that high for that long since the Great Depression) and all the real-world evidence we have indicates that austerity in depressions cripples economic growth. If everyone agrees the debt crisis is not immediate, then job growth and economic revival should be topping deficit reduction on the country’s list of priorities.

Nor is there a great deal of evidence to back up Boehner’s distinction between an “immediate” and “looming” debt crisis. The long-term projections of mounting debt he and other D.C. lawmakers rely on are in fact riddled with dramatic assumptions and uncertainties about the future behavior of both Congress and the economy.

Once again, the March budget season has arrived, and Rep. Paul Ryan (R-WI) has engineered another draconian fiscal vision for the House Republicans. The plan would radically remake Medicare, decimate Medicaid, grant a huge tax cut to the wealthy, and slash support for the poor, investments, and civic infrastructure.

Ryan and his cohorts justify these plans by insisting that America faces a “debt crisis,” that the deficits we’re currently running are too high, and that we must act immediately to fix these problems. Centrists and other “serious” pundits and lawmakers throughout Washington have bought this argument, if not all the details of Ryan’s specific solution, and they’ve scoffed at President Obama’s insistence that we don’t actually face a looming debt crisis. Here are the reasons Obama’s right, and they’re all wrong:

1. We don’t ever have to actually eliminate the debt: The United States ran up a huge debt burden in World War II. More importantly, in raw dollar terms, we never repaid that debt. We simply grew the economy so that the size of the debt fell in comparison. That’s what’s happening in graphs where the debt burden drops in the post-war years. That burden is measured as a ratio of debt-to-GDP, and in ratios the denominator matters as much as the numerator.

2. The budget doesn’t actually have to balance to reduce it: If we can keep deficits under a certain threshold every year, then economic growth will overtake it, meaning our debt-to-GDP ratio will either stay the same or even drop. For the immediate future, the economy looks set to grow by about 4 percent a year in nominal terms (that is, real growth plus inflation). If we can keep each year’s deficit to 4 percent or less of public debt already held, debt-to-GDP will stabilize. America can, in fact, run deficits in perpetuity.

3. The debt is already as balanced as it needs to be: Federal spending involves a host of programs called “stabilizers” — spending that automatically kicks in when the economy tanks, without any acts on the part of lawmakers, boosting GDP growth and helping Americans who have lost their jobs. These include unemployment insurance, food stamps, welfare, Medicaid, and many others. Tax revenues also naturally fall as unemployment rises.

The Congressional Budget office just released a report that stabilizers will add $422 billion to the deficit in 2013. That leaves $423 billion — out of the estimated $845 billion deficit for the year — that isn’t due to the automatic stabilizers. Publicly held U.S. debt is currently around $11.5 trillion, and $423 is less than 4 percent of that.

Take out the stabilizers, and the deficit is within the window necessary to stabilize the debt. And all we have to do to unwind the stabilizers is get the economy firing on all cylinders again. This holds true for about the next decade, before growth in Social Security, Medicare, and Medicaid finally begin to slowly overtake it. The country still has problems, but it has lots of time to sort them out.

4. The “debt crisis” is not a certainty: Paul Ryan may talk as if it is, but it’s merely a projection — one possible result if the CBO’s guesswork about the future proves accurate. The Center for American Progress recently dove into CBO’s methodology, and found that the projections build in a host of sometimes-dramatic assumptions about Congress’ future spending and taxation choices, as well as other factors that could very well not come to pass.

Beyond trying to predict future Congress’ policy preferences, much of the future debt is based on projections that health care costs will continue growing at their previous trend. But the whole point of health care reform is to alter that trend by altering health care markets. Obamacare may already be doing this. CBO’s projections for Medicare spending over the next decade dropped by $500 billion between 2010 and 2013, simply because health care cost growth unexpectedly slowed.

In fact, if that slowdown becomes the new norm, Medicare spending will stay essentially flat as a share of the economy from here on out. That doesn’t show up in CBO’s long-term projections because their methodology uses cost growth over the last two decades to predict future trends. (See page 60.) It’s literally within the realm of reasonable possibility that the long-term debt problem is already solved — all without lawmakers having to cut a dime.

5. We don’t know how much debt actually causes crisis: Ryan and others often cite a finding that economic growth slows as debt-to-GDP reaches 90 percent. But there’s a big correlation-causation problem with this. Remember the denominator: slowing GDP, regardless of debt, could raise debt-to-GDP just as much as higher debt could. And the countries that fit with the 90 percent threshold prediction also present an apples-to-oranges problem when compared to America. Britain, Japan, and France — advanced democracies like ours, with their own currency — shouldered debt levels far in excess of 90 precent over extended periods of time in the past. No debt crisis arrived.

In conclusion: the “debt crisis” is a mere phantom — only one of many possible futures, and far from a certainty. The interest America is paying on its debt is currently lower than it was in the 1990s, despite a lower debt-to-GDP ratio then. When inflation is factored in, current real interest rates on our debt are negative. Financial markets are willing to pay us to borrow from them.

Meanwhile, every dollar we cut — nay, every dollar we fail to borrow — is a dollar that isn’t going to shore up the safety net, to rebuild the country’s infrastructure, or to support struggling Americans while their livelihoods remain on the line. That we’re passing on this opportunity to repair our country, much less even considering the monstrosity that is the Ryan budget, really is absurd.

House Budget Committee Chairman Paul Ryan (R-WI) unveiled the third version of his budget this morning, and due to the demand of his party’s conservative base, this version supposedly achieves balance within 10 years, at least a decade faster than past versions would have theoretically achieved the same goal.

But just like past versions, this version will fail to actually achieve the balance Ryan claims. That’s because the budget only gets to a balanced level in 2023 because Ryan has assumed revenue and spending levels that his budget can’t actually match. Ryan’s budget provides more than $7 trillion in tax breaks to the wealthy and corporations without proposing specific ways to make up for that lost revenue, meaning his budget — the one he has touted as a plan to rein in Washington’s runaway deficits and debt — will fall short of his goals, as Center for American Progress Tax and Budget Policy Director Michael Linden explains:

Last year the Tax Policy Center estimated that these provisions would generate revenue equaling just 15.8 percent of GDP in 2022. Extrapolating to 2023 suggests that Rep. Ryan is missing about $840 billion of revenue in 2023 alone, and approximately $7 trillion over the entire 10-year period from 2014 through 2023. After accounting for the added interest costs from all of these unpaid-for tax cuts, Ryan’s budget would still be about $1.2 trillion in the red in 2023.

But it isn’t just fantasy revenue levels on which Ryan relies. He also is basing his budget on massive spending cuts that aren’t laid out in specific (and haven’t been in previous versions either) and aren’t realistic, given that they would take spending levels lower than they have ever been before. As Linden notes, Ryan’s budget would drop non-defense discretionary spending to just 2.1 percent of GDP, even though it has never totaled less than 3.2 percent of GDP since records began in 1962.

It’s for this reason that the Congressional Budget Office told Ryan it couldn’t give him a better long-term outlook for his budget — the only reason the nonpartisan office could judge the plan at all was because it applied the revenue and spending assumptions he provided. And because Ryan cuts so much revenue without a plausible way to make up for it, his plan to reduce the debt would likely add trillions of dollars to it instead.

Budget cuts under the so-called “sequester” will go into effect on Friday. Independent estimates shows that the cuts will cost anywhere from 700,000 to 750,000 jobs. And the end result may be very little deficit reduction as well, as a more depressed economy will not produce as much in the way of revenue, as economist Adam Hersh explained.

During a hearing before the House Financial Services Committee today, Federal Reserve Chairman Ben Bernanke patiently tried to explain this to Rep. Sean Duffy (R-WI), who wasn’t having it:

DUFFY: Instead of encouraging responsibility, you come in and say “listen to cut 2 percent of our budget, you can’t do it. It’s going to have a great impact on our economy.” Mr. Chairman that doesn’t make sense to me.

BERNANKE: Well, I think most economists, including the CBO, would say this will cost a lot of jobs in the short run. And you can achieve the same results with longer-term programs. [...]

DUFFY: So then are you here telling us if we cut $85 billion in a more reflective way — in the bad spending that I just referenced — you would support it? It’s a good idea if we’re not doing it by way of the sequester, but we had a little more reflective analysis on the $85 billion.

BERNANKE: It would be better.

DUFFY: So is it better or you agree with us that we should actually reduce spending?

BERNANKE: I’m still concerned about the short-term impact on jobs. And you don’t get as much benefit as you think, because if you slow the economy that hurts your revenues and that means your deficit reduction is not as big as you think it is.

Watch:

For evidence of what Bernanke is talking about, one needs to look no further than Europe, where austerity — rather than sparking a recovery — has led to weak growth, high unemployment, and yes, more debt. In fact, the EU’s debt “was barely changed at 90 percent of gross domestic product in the third quarter of 2012 compared with 89.9 percent for three months earlier…It was up from 86.8 percent of GDP a year earlier,” even after the continent embraced deep spending cuts and reforms.

The United States is on the brink of sequestration, the $1.2 trillion in automatic budget cuts included in the summer 2011 deficit deal that will begin taking effect March 1 if Congress does not act to avert them. The goal of the cuts is to reduce America’s budget deficit, which remains Washington’s focus even as unemployment is high and the overall economic recovery is modest at best.

Despite the $85 billion in cuts that will take place this year, it is entirely possible that sequestration won’t actually lead to substantial shrinking of America’s deficit. There are a number of reasons for that, as Scott Lilly from the Center for American Progress explained in a column today. The primary reason, though, is that fiscal contraction caused by sequestration is likely to slow economic growth, reducing tax revenue and preventing meaningful deficit reduction, as CAP’s Adam Hersh notes:

Figure 1 also shows that the projected effect of the sequester will be to lower U.S. economic output by $287 billion from where we would be without any fiscal contraction—barely ahead of where the U.S. economy was at the end of 2012. To be certain—with sequestration on top of other fiscal contraction draining so much momentum—the U.S. economy would need to steer clear of all other risks to growth: potential oil- and commodity-price shocks, slowing global demand for U.S. exports, and the faltering confidence in the governability of U.S. economic policy. It is possible none of those risks will rear their ugly heads in the next year, but it would be foolish to bet America’s economic future on it.

Lilly estimates that the cuts could result in $17 billion in lost revenue this year, but because reducing government investment will also inhibit private sector growth, the effects may be even bigger than the Congressional Budget Office projects:
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European austerity has already proven a terrible failure, driving the continent as a whole back into a recession and pushing unemployment to record levels. Despite promises from leaders across Europe that reducing deficits would spur growth, that hasn’t been the case. And worse yet, the focus on austerity hasn’t even led to the deficit reduction many European countries are chasing.

The United Kingdom has fallen far short of its deficit reduction goals, and France is likely to miss its deficit reduction targets too. Today, Fitch ratings announced that Spain too had missed its target, and it will miss its 2013 target thanks to a lack of economic growth:

Spain to miss 2013 deficit target of 4.5%, due to 1.6% GDP fall, says Fitch. Deficit to be 6%/GDP, debt to peak in 2014-2015 around 96%/GDP.

— Jamie McGeever (@ReutersJamie) February 21, 2013

Though European deficits are declining, they are doing so far more slowly than projected thanks to a lack of economic growth that has made much of the deficit reduction policies counterproductive. European countries continue to cut spending to reduce deficits, causing more fiscal contraction that in turn slows down deficit reduction efforts or, worse, makes deficits larger. When the United Kingdom, which has the economy most comparable to America’s, instituted its first round of austerity in 2010, it projected its deficit would fall from 4.8 percent of GDP to just 1.9 percent. Instead, the country is on the brink of a third recession and its deficit stands at 4.3 percent of its economy. In other deficit-focused countries, unemployment has skyrocketed — Spain’s unemployment rate topped 25 percent in January.

The United States originally approached economic recovery by focusing on stimulus instead of deficit reduction, a path that led to a stronger recovery than Europe’s. But it too has since embraced deficit reduction, the most serious round of which looms on March 1 when sequestration will begin taking effect. Those spending cuts could knock 0.6 percent off of annual economic growth while costing the nation 700,000 jobs. Drops in federal spending have already hurt the recovery, and if Europe is any indication, efforts to rapidly reduce the deficit will likely serve only to reduce growth and complicate deficit reduction efforts instead.

Former Republican Senator Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles will release a new plan today to reduce the deficit by $2.4 trillion over the next decade. The pair of deficit hawks previously co-chaired a 2010 commission on fiscal reform (which failed) and then released a proposal for $6.3 trillion in deficit reduction.

That plan became a go-to talking point for Republicans — except, of course, whenever Obama recommended similar targets.

The new Simpson-Bowles plan adds an additional $2.4 trillion in savings onto the approximately $2.4 trillion in deficit reduction the United States has already carried out since 2010. Roughly three-fourths of that new $2.4 trillion would come from spending cuts and savings on interest payments:

The outline below is not meant as a revision to the original Fiscal Commission plan, but rather builds upon where elected leaders were in their negotiations last year. […]

[W]e call for an additional $2.4 trillion of deficit reduction over the next ten years. Roughly one quarter of those savings should come from health care reforms and another quarter from tax reform. The remaining savings should come from a combination of mandatory spending cuts, stronger discretionary caps, cross-cutting changes such as adopting the chained CPI for inflation-indexed provisions in the budget, and lower interest payments. This $2.4 trillion should exclude savings from policies such as the war drawdown.

There’s a very simple problem with Simpson and Bowles’ latest proposal: It represents a massive shift away from their own previous target and towards even more spending cuts.

As the Center On Budget and Policy Priorities previously laid out, the original 2010 Simpson-Bowles plan split its $6.3 trillion in deficit savings between $2.9 trillion in spending cuts, $2.6 trillion in tax revenue, and $800 billion in reduced interest payments on the debt. Since then, the country has passed roughly half of those recommended spending cuts — but less than a quarter of the recommended tax increases, according to recent calculations from the Center for American Progress.

Between the budget deals in the spring of 2011 and the Budget Control Act, which averted the debt ceiling crisis that same year, spending has been cut by $1.5 trillion and interest payments reduced by another $200 billion. Then the American Taxpayer Relief Act, which solved the impasse over the “fiscal cliff,” raised $600 billion in new tax revenue.

So if Simpson-Bowles are interested in “building upon” what lawmakers have already achieved, the logical thing to propose is another $1.4 trillion in spending cuts plus another $2 trillion in additional tax revenue. Or if they’re happy with their new $4.8 trillion target — rather than the original $6.3 trillion — their new proposal should heavily favor tax increases, since deficit reduction so far has favored spending cuts by three to one. Instead, Simpson and Bowles are proposing $1.8 trillion in new spending cuts and reduced interest payments, and only $600 billion in additional revenue.

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