Attacking an Elephant with a Fly Swatter

According to CNN's latest summary of leaks, speculation and spin respecting the negotiations between House Republicans and the President over raising the debt limit:

It's time to "pull off the Band-Aid" and "eat our peas," Obama told reporters of the need for both sides to make difficult choices to address the nation's mounting federal deficits and debt. "Let's step up. Let's do it."

Noting that Republicans have pushed for decisive action on debt reduction, Obama urged them to compromise from their blanket refusal to end Bush-era tax cuts for wealthy Americans. The president said he'd be willing to push Democrats to do something they don't like -- reform Medicare and other entitlement programs that are the party's political legacy -- in an effort to reach his goal of trimming the deficit by $4 trillion over the next 10-12 years.

Of course, much of that "saving" occurs disproportionately in later years, with respect to which it's easier to get the numbers to say whatever you'd like.

Most importantly, it presently appears that such a grand deal -- saving $4 trillion over 12 years -- is too much for too many politicians to swallow, and is likely to fail.

But lack of agreement is not the most depressing aspect of this ritual. Keep in mind that experience and well-justified skepticism suggests that many of these savings will never materialize. But, even if they do, the grand, impossible deal would save only $333 billion per year.

Now ponder this: According to the Congressional Budget Office, the Federal Government is projected to run a deficit of $1.5 trillion for the current fiscal year, which ends with September. That is to say, a budget deal too radical and controversial to pass would amount to less than one-quarter of the Federal Government's deficit for 2011.

The CBO also has an estimate for the sum of the annual deficits for the next 10 years, 2012 through 2021. That number is just shy of $7.8 trillion. And CBO itself has little confidence that the deficits will be that small:

Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

Which is to say that if present practices continue, and promised spending reductions and tax increases never materialize, the 10-year deficit will be even higher.

So as you listen to the faux statesmanlike pronouncements from our leaders, consider that their most ambitious plan, now admittedly politically impossible, would do no more than cut in half the amount of additional debt that will accumulate over the next 10 years.

But the situation is actually far worse than these frightening numbers would suggest. Today, the average cost to the Treasury for borrowing is 2.5%. The average cost of the Treasury borrowing over the last twenty years is . . . 5.7%. If interest rates were to rise from their current historically low rates to the more reasonable 20-year average, then over the next 10 years interest costs to service the national debt would increase by about $4.9 trillion. That is, if interest rates return to more normal levels, the politically impossible 10-year deficit reduction "savings" of $4 trillion would be more than wiped out.

Have a wonderful day.