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The U.S. has never been more financially exposed heading into a potential economic crisis. With the national debt now equal to 100% of the country\u2019s entire economic output\u2014a level not seen since World War II\u2014a prominent nonpartisan think tank is sounding the alarm: The country is flying blind into its next emergency, and the consequences for ordinary Americans could be severe.<\/p>\n
The Committee for a Responsible Federal Budget (CRFB), a Washington-based fiscal watchdog whose board includes former senators, cabinet secretaries, and governors from both parties, has released a sweeping new report warning policymakers are \u201cwoefully underprepared\u201d to handle the next recession or financial shock. <\/p>\n
\u201cThe country is almost certain to enter the next shock more indebted than we have ever been before,\u201d the think tank said, \u201cwhich may significantly hamper our ability to marshal an appropriate response.\u201d<\/p>\n
The group is calling on Congress to develop what it calls a \u201cBreak Glass Plan,\u201d as in \u201cbreak glass in case of emergency.\u201d It would be a prenegotiated emergency blueprint ready to deploy the moment a crisis strikes.<\/p>\n
\u201cThe U.S. has never experienced an economic shock as indebted as we are today,\u201d the report states bluntly. \u201cThis situation leaves the U.S. immensely vulnerable.\u201d\u200b<\/p>\n
It won\u2019t be easy, either, according to the CRFB: \u201cOur dismal fiscal outlook, in combination with lingering inflationary pressures and ongoing Treasury market volatility, makes crafting any response to a potential future economic shock extremely difficult.\u201d <\/p>\n
But happen it must.<\/p>\n
Different from the dot-com bubble<\/p>\n
The report lays out the high stakes. When the dot-com bubble burst in the early 2000s, U.S. debt stood at just 34% of GDP and the federal government was running a surplus. When the 2008 financial crisis hit, debt was 35% of GDP. When COVID-19 arrived, it was 79% of GDP. Today, the debt sits at roughly 100% of GDP, annual deficits are near 6% of GDP, and interest payments now consume nearly one-fifth of all federal revenue \u2014 roughly double the share from each of those prior crises.\u200b<\/p>\n
The numbers are only expected to get worse. By 2036, according to Congressional Budget Office projections cited in the report, debt is on track to reach 120% of GDP, with interest swallowing $0.26 of every dollar the government takes in.\u200b<\/p>\n
The CRFB laid out all of its disaster scenarios, ranging from the popping of an asset bubble in real estate, equities, AI, or digital assets to other black swan events such as a natural disaster, war, or collapse of a major industry. The report was drafted on embargo before the U.S. and Israel hit Iran with air strikes, freezing traffic through the Strait of Hormuz and sending oil prices soaring above $100 per barrel. The CRFB also flagged fiscal or monetary policy errors as a major risk, especially in trying to manage a \u201cstagflation scenario.\u201d This is a distinct possibility, the longer the Iran War drags on.<\/p>\n
A history of haphazard responses<\/p>\n
The CRFB\u2019s core concern is not just that America is broke\u2014it\u2019s that Washington has a well-documented habit of making things worse when a crisis hits. <\/p>\n
\u201cToo often, lawmakers wait for the emergency to happen before thinking through how they might react,\u201d the report warns. \u201cThese crisis-driven responses can be costly and haphazard and, in some cases, may solve one problem while creating another.\u201d\u200b<\/p>\n
As evidence, the group points to the last two major downturns. The Great Recession added roughly 35 percentage points of GDP to the national debt. The pandemic response added another 20 points. In neither case did Washington subsequently rein in its borrowing once the immediate danger passed. The result is a structural deficit that now operates as a permanent feature of the federal budget rather than a temporary response to crisis.\u200b<\/p>\n
The report also warned against the reflex to simply spend. <\/p>\n
\u201cAs the experience in the early 2020s showed, excessive stimulus can ultimately lead to surging inflation and interest rates, particularly if supply is constrained,\u201d it said. And if the next crisis is itself triggered by high debt\u2014through a collapse in Treasury market confidence, a currency crisis, or a spiral of inflation\u2014piling on more borrowing could actively backfire. <\/p>\n
\u201cNear-term fiscal stimulus is often an appropriate response to a recession or economic shock. But in an environment where high debt fuels panic, debt-increasing fiscal stimulus can backfire,\u201d the report states.\u200b<\/p>\n
The four-part plan<\/p>\n
To avoid repeating past mistakes, the CRFB proposed Congress develop and agree upon a four-part emergency framework before the next crisis arrives.<\/p>\n
The first element is a targeted, right-sized stimulus response\u2014one tailored to the specific nature of the shock and stripped of what the report calls \u201ca wish-list of priorities\u201d that lawmakers too often attach to emergency bills.\u200b<\/p>\n
The second is a \u201cSuper PAYGO\u201d rule that would require Congress to pair every dollar of near-term emergency spending with two dollars in medium-term savings. <\/p>\n
\u201cAdopting two-for-one deficit reduction would send a signal to creditors that our government is serious about controlling the growth of debt, even as we engage in near-term borrowing to support the economy,\u201d the report said. <\/p>\n
Potential savings vehicles already exist on a bipartisan basis: Requiring Medicare to pay equal rates for the same procedure whether performed in a hospital or a doctor\u2019s office, could save $210 billion over a decade; reducing Medicare Advantage overpayments could save $170 billion more; and closing an exploit in the state and local tax deduction cap could raise $200 billion.\u200b<\/p>\n
The third element is what the CRFB called a \u201cdefault deficit reduction mechanism\u201d\u2014an automatic set of fiscal guardrails that would kick in once the economy recovers. The mechanism would freeze the automatic growth of spending programs, including Social Security, Medicare, and Medicaid, hold discretionary spending flat, and phase in a graduated surtax on high earners and corporations. Under the group\u2019s estimates, such a mechanism could cut deficits to 3% of GDP within four years, saving $3.5 trillion over five years and $10.25 trillion over a decade.\u200b<\/p>\n
The fourth piece\u2014and perhaps the most politically ambitious\u2014is a bipartisan fiscal commission empowered to replace those blunt automatic cuts with more carefully tailored reforms to the tax code, entitlement programs, and the federal budget process. The commission would specifically be tasked with \u201crestoring solvency to Social Security and Medicare\u201d and \u201creducing fraud and abuse,\u201d according to the report. Its recommendations would receive expedited votes in both chambers of Congress.\u200b <\/p>\n
This is exactly what some Social Security advocates long to see happen.\u00a0Martha Shedden, president and cofounder of the National Association of Registered Social Security Analysts, told Fortune earlier this month she longed for another bipartisan commission similar to that of 1983, when Democratic Speaker Tip O\u2019Neill and President Ronald Reagan put politics aside to ensure Social Security would continue.<\/p>\n
Why now<\/p>\n
The CRFB\u2019s warning landed at a moment of particular volatility. Long-term Treasury yields remain elevated\u2014over 4% on ten-year notes and approaching 5% on 30-year bonds\u2014while inflation lingers above the Federal Reserve\u2019s 2% target. Congress is simultaneously debating sweeping tax and spending changes that the CRFB and other fiscal watchdogs warn could add further trillions to the debt.\u200b<\/p>\n
Since 1950, the U.S. has experienced 11 recessions\u2014roughly one every seven years; the last one ended in 2020. By historical averages, another could arrive at any time. And unlike every prior downturn in modern American history, the next one will find the U.S. Treasury with less room to maneuver than it has ever had.\u200b<\/p>\n
\u201cThe sooner such a plan is ready, the better,\u201d the report concludes. \u201cOne never knows when an emergency will arise, and we must be prepared to break the glass.\u201d\u200b<\/p>\n
#U.S #entering #financial #crisis #indebted #Heres #warning #Washington #ignoring<\/p>\n","protected":false},"excerpt":{"rendered":"
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