Republicans in the U.S. House recently made public their first round of spending cuts. In the media reports that followed, the word "slash" naturally got a good workout.
Yet when you got to the bottom line, the cut initially proposed was around $35 billion — a mere rounding error relative to our trillion-dollar deficits. The number was so low, it sparked a rebellion on the right. Late last week, GOP House leaders were discussing ways to make deeper cuts.
The specific number aside, what the Republicans are pushing is extremely important. The initial cut proposed wouldn't be the usual Washington-style reduction, which is typically a smaller-than-planned increase. No: The GOP is proposing an absolute cut — a rare, almost unheard-of instance of subtraction in Washington.
Rep. Chris Van Hollen of Maryland, ranking Democrat on the Budget Committee, said the proposed cuts "will harm the economy and put more people out of work."
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Yes, they could force furloughs in the agencies affected. And, as Associated Press reported, they could "force vulnerable people off subsidized housing, reduce services in national parks and mean less aid to schools and police and fire departments."
That's nothing compared with what could happen if Congress continues spending as usual. The financial crisis sure to follow — on some unknown date — would make the pain of these cuts look minor by comparison.
Since the credit-market meltdown of 2008, the Treasury has been borrowing hand over fist to finance our massive deficits.
To get money for government expenses not covered by tax revenue, we need investors to continue buying Treasury bonds. The interest rate for those bonds is set by what investors are willing to accept to cover the risk of default (extremely low) and the risk of inflation (increasingly a worry).
If the interest rate isn't high enough, investors will take their money elsewhere until rates rise to cover the perceived risks. In fact, for longer-term bonds, rates have been rising steadily since last November.
And here's something to make you queasy: Investment adviser Chris Butler of Butler Lanz and Wagler says Chinese purchases of 10-year and 30-year bonds have been lagging in recent weeks.
"The Chinese are no longer willing to buy our longer-term paper," he said. "They're buying our short-term bills and notes."
In other words, there already are doubts in the market about whether Washington will ever get its house in order, and that's adding to the upward pressure on interest rates.
Since Treasury securities set the benchmark for almost every other interest rate in the economy, the costs of financing corporate debt, mortgages, credit card balances — interest rates across the board — will go up as well.
We have to remember that the market's ability to ingest debt is not unlimited. If some unforeseen event triggers a crisis in the bond market and the interest rate on Treasuries shoots up, the resulting economic shock would ripple across the entire economy.
Think about the economy's health right now. At any given moment, there are thousands of companies and small businesses "on the margin," as economists say. These firms are very close to failure. One more unforeseen expense, one more increase in the price of a key raw material, one more uptick in a loan rate — and they're done.
Many "on the margin" wouldn't survive a big rate hike. There's no way of knowing how many are in this situation, but they will take the brunt of the shock — along with their employees in the form of lost jobs. Thousands of pending financial or development deals that depend on a given interest rate won't get done because that rate no longer will be available.
The longer Washington continues to spend, the more likely a rate shock becomes.
It's true that we won't get control of the spending monster without dealing with the big entitlement programs — Social Security, Medicare and Medicaid — which aren't touched in the proposed spending cuts. But you have to start somewhere. That's why it's imperative that these initial cuts are approved.
It's also true that of necessity, tax increases probably will be part of any long-term solution to our fiscal problems. Voters will find that prospect much more palatable if it comes after Congress has shown it finally has gotten serious about spending. In that regard, our lawmakers have a long way to go.