The long-term threat of mounting federal debt has become a looming catastrophe, a distinguished group of economists and former public officials said today, but their "call to action" faces the same political barriers and lack of public concern that have blocked such an effort for years.
Chief among these barriers is the worry that the economy is too weak to begin the combination of tax increases and spending cuts needed to control the federal debt. The recommendations, sponsored by the Peterson Foundation, the Pew Charitable Trusts and the Committee for a Responsible Federal Budget, suggested delaying action until 2012 at the earliest. President Obama, meanwhile, plans to increase spending and tax cuts to help promote jobs next year, while somehow delivering what his advisers call a "down payment" on debt reduction.
With evidence of an economic recovery taking hold, it is unclear how much of this delay in unpopular deficit-cutting is based on economics. Republicans and Democrats show signs of wanting to claim the mantle of fiscal conservatism in the 2010 election, but there's no indication that they will deliver it, according to Willis Gradison, a former top Republican member of the House Budget Committee. "I am hard-pressed to find anyone who lost an election by bringing home too much bacon," Gradison said.
The three nonprofit groups, which often scold official Washington for failing to confront the budget problem, decided to join forces, mustering what seemed like every retired Budget Committee chairman and former director of the Congressional Budget Office. The three leaders of the group are all former House members, and they emphasized that they understand very well the difficulties of getting the government to embrace big tax increases and large spending cuts.
Alice Rivlin, former vice chairwoman of the Federal Reserve Board and the founding director of the CBO, said that the longstanding challenge of growing entitlement spending had combined with profligate budget policy over the last decade and the recent commitments to rescue the U.S. economy to greatly advance the day of reckoning for fiscal policy. "What was a 30-year problem has become a 10-year problem," Rivlin said. Net federal debt, which is running at about $8.8 trillion this year, will more than double to $17.4 trillion in 2018, rising from 60 percent of annual gross domestic product to 85 percent, she said.
Debt at that level in other countries has triggered ruinous credit crises and depressions, especially when borrowing is heavily dependent on foreign lending, as is the case in the United States, said former Texas Rep. Charles Stenholm, a fiscally conservative Democrat. "Our banker is the People's Republic of China, with about $7 trillion more coming from other folks," said Stenholm.
The Peterson-Pew report calls for Congress and the president to reach a giant, long-term budget deal, starting next year, under the threat of automatic budget cuts and tax increases much stricter than those used episodically from 1985 to the mid-1990s. A future report will detail this process.
Elsewhere in Washington on Monday, the liberal Center for American Progress embraced the much more ambitious goal of reducing budget deficits to less than 3 percent of GDP by 2014 -- and actually balancing the budget in 2020. But CAP President John Podesta wouldn't say how taxes would increase or spending would fall to meet this goal, beyond the relatively small tax hikes on the rich that Obama has embraced. Podesta, former chief of staff to President Clinton, framed many of his points around the argument that President George W. Bush was responsible for much of the budget problem: "With that statutory mechanism, solid targets and a gradual path towards balance... we think the debt problems that President Obama inherited could be dealt with, worked down."
The Peterson-Pew group's members were hard-pressed to account for why the looming debt problem hasn't been reflected in higher interest rates for long-term borrowing, at a time when the United States would presumably risk defaulting on its bonds without drastic action. Jim Jones, former House Budget Committee chairman and later chief executive of the American Stock Exchange, said he was shocked at how irrational investors often are. It should have been "a wake-up call" when Moody's Investors Service warned last week that it might downgrade its safety rating for the government debt issued by Great Britain and the United States, he said. Jones said it seems as though investors are focused on near-term questions about the global recession instead of the U.S. fiscal problems just over the horizon.
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