The U.S. Fiscal Crisis: We're the Problem

Last week, the Obama administration agreed to $4 billion in spending cuts to give Congress a bit more breathing room in the budgetary showdown. The resolution kicks the can a bit further down the road, but does nothing to change the nature -- and fruitlessness -- of the debate.

The Republican-led bill that passed in the House is looking for $61 billion in spending cuts. Not only is this number a drop in the bucket as compared to the country's real budgetary problem (more on that in a second), but to a disturbingly large extent, these proposed cuts are simply business-as-usual ideological volleys masquerading as fiscal discipline.

Here are a few of the amendments on the bill, courtesy of The New York Times:    

Source: The New York Times.

And those, of course, are just the amendments. As for the bill itself (H.R. 1 for those that want to read it themselves), according to numbers from the GOP, it's pretty obvious that the budgetary knife was swung with gusto at areas that clash with the Republican agenda, while the right's traditional stronghold in military and defense was at the receiving end of less slashing.

Source: GOP.gov, Congressional Budget Office.

Some of the cuts -- like deep cuts in foreign aid -- would represent notable policy changes. Some, like the cuts for financial services, could hamper the enforcement of new regulations stemming from the financial crisis. Other cuts seem downright silly -- for instance, it's estimated that the $600 million cut to the IRS' budget would result in $4 billion less in IRS collections. Overall though, most of the cuts not only individually meet Republican objectives but also work toward the broader goal of a smaller government.

And hey, it doesn't hurt to keep corporate citizens happy in the process. Defense companies like Lockheed Martin (NYSE: LMT) and General Dynamics (NYSE: GD) have to be breathing easier seeing that major cuts in defense spending still seem to be a no-no. Meanwhile, still-too-big-to-fail banks like Bank of America (NYSE: BAC), Citigroup (NYSE: C), and JPMorgan Chase (NYSE: JPM) can be thankful for potentially underfunded Dodd-Frank regulatory agencies.

Fighting mad
Am I just trying to get everyone fired up over battleground political issues? Hardly. The point is that the hotly contested cuts that lawmakers are discussing give us an easy way to pretend that something is being done about the budget while ignoring the real issue. As a result, instead of getting the real, substantive budget debate that we need in this country, we're just getting more of the same, familiar clashing over ideological differences.

As my fellow Fool Morgan Housel pointed out last month, the budgetary beast isn't the nondefense discretionary spending that so often hear about in the media -- it's defense spending and "mandatory" spending that includes Social Security, Medicare, and Medicaid. The Economist said roughly the same thing yesterday, providing a handy graph that illustrates just how quickly we may find ourselves buried under the kudzu-like growth of entitlement spending.

Tough choices
What we need is not quibbles over relative pennies in nondefense discretionary spending but a sustainable plan for entitlement programs. But that's not happening. Is it because our elected officials are simply cowards? Could be -- though if that's true, it's because we've made them that way.

As Morgan pointed out late last year, Americans seem to recognize the impending fiscal doom we face if entitlement programs aren't fixed, but few are willing to have their own benefits cut. He noted a finding from the Tax Policy Center:

Three-quarters of Americans believe that entitlement programs such as Medicare and Social Security "will create major economic problems" over the next 25 years. But two-thirds are opposed to addressing these challenges by reducing benefits, and 56 percent are against raising taxes.

And this is all on the spending side of the equation. While there seems to be a lot of moaning about U.S. tax rates in the news, according to data from the OECD, taxes as a percentage of GDP in the U.S. are among the lowest, undercut by just Turkey, Chile, and Mexico. When total taxes are considered, even countries like Ireland that are touted for low tax rates collect more than the U.S.

Source: OECD.

Our elected officials aren't any different than the rest of us -- they're driven by incentives. For the most part, their prime incentive is going to be to keep their constituents happy and staying in office. And as far as I can tell, raising taxes and/or curtailing entitlements will tick off enough voters to ensure that neither of those goals is met.

As long as we collectively continue to be unwilling to take hits to our own personal bottom lines, nothing will ever change in Washington, leaving us stuck with piddly debates that don't offer any real solutions for our budget crisis.

So my question to you is this: What would you be willing to swallow? Lower Social Security benefits? A value-added tax? A stingier Medicare? Head down to the comments section and sound off.