I fully agree with Karl. Yes, the automatic cuts would be painful, and, in tandem with the automatic tax increases, they would deepen the coming recession. But he's right: there's no more time. We have to bite the bullet and address the debt and entitlement crises now. In a recent post on his incredibly informative (albeit aesthetically-unfortunate) site, market-ticker.org, Karl described the depth of the Social Security and Medicare crises:
There is no Social Security or Medicare "Trust Fund." Beginning in the 1980s they were effectively merged into the general fund and immediately spent. The funds were not invested, they were stolen. The claim that there is a "trust" is an accounting fiction. If you or I did this with our kid's UTMA account (college trust account) we'd go to prison.
The money is gone. The so-called "IOUs" are not negotiable debt instruments. They have no formal, legal standing as debt. Further, they cannot be exchanged for actual cash unless the Treasury is able to issue actual debt into the market, because Treasury has no cash either; it is spending $1.7 trillion more than it takes in every year. If that ability to issue ceases, the $4.6 trillion will not be paid. Period.
Neither Social Security or Medicare can pay what has been promised. Social Security is cash-flow negative now (as of last year) and will be permanently on a forward basis. Within 20 years there will be one retiree for every two persons working. But the amount of tax received from those workers will only cover somewhat less than half of the money that has been promised to be paid out. In other words once the IOUs are depleted the promised funds will not be paid. Period.
Social Security, by law, cannot borrow nor can go in the hole. By law when either (1) the IOUs run out or (2) the Treasury cannot issue any more actual debt into the market to cover the IOUs Social Security is required under existing law to reduce payments so that it is cash-flow neutral. This means that under existing law when the IOUs run out - in the best case - only about half of the promised benefits can be paid.
Medicare is even worse. There the pay-out to pay-in ratio is more like 4:1. There is also far less tax revenue available, since Medicare has a combined rate of 2.9%, where Social Security is 10.4% (12.4% after two years, assuming it goes back up.) That is, Medicare is trying to fund itself with a revenue base of about 1/4 that of Social Security, although Medicare is paid on all earnings as there is no cap. Medicare is also cash-flow negative on a permanent basis right now.
Clinton never ran a surplus. He stole the Social Security and Medicare surplus funds and spent them. This made his budget look like it had a surplus when it really did not. The claim of a "Trust" is belied by this fact, along with all the other budgets since Reagan - you cannot have a Trust arrangement if the entity allegedly encumbered, in this case the government, isn't actually holding the funds in trust but rather is counting them for general revenue purposes!
Pretty scary, huh? Indeed, in a sharp infographic, ZeroHedge compared the the colossal deficit (just the deficit, not the debt) with the automatic spending cuts and tax increases we would see if no deal were reached:
The cuts and tax increases look enormous at first, but look how puny they are compared to the deficit. Remember, that's just the federal government's annual deficit. If you were to compare the cuts and tax increases to the federal debt, the pallets of dollars depicted in the image would fill a scale model of the National Mall.