VOL. 125 | NO. 83 | Thursday, April 29, 2010
Deficit Fix Painful, Inaction’s Worse
ANDREW TAYLOR | The Associated Press
WASHINGTON (AP) – The costs of solving the federal deficit problem are more than many people want to pay – higher taxes on a wide swath of Americans and cuts in benefit programs that reach into millions of homes.
But the results of inaction on the steadily growing debt threat are even more costly: fundamental damage to the U.S. economy and a lower standard of living for future generations.
The warnings from deficit hawks are much more urgent since the nation’s fiscal health went from bad several years ago to drastically worse with the financial crisis and recession of 2008 and 2009. Last year, the government borrowed $1.4 trillion, nearly 40 cents of every dollar it spent.
“The path forward contains many difficult trade-offs and choices, but postponing those choices and failing to put the nation’s finances on a sustainable long-run trajectory would ultimately do great damage to our economy,” Federal Reserve Board Chairman Ben Bernanke told President Barack Obama’s 18-member deficit commission Tuesday.
As Bernanke testified, the stock market began a precipitous dive after Standard & Poor’s downgraded the debt of Greece to junk bond status. The Mediterranean country is mired in a debt crisis that has shaken its economy and markets.
The United States is a long way from where Greece is. But U.S. deficits – like last year’s $1.4 trillion – that continue well in excess of 4 percent of the nation’s total economic production are unsustainable, most major economists say.
Such deficits would push interest rates higher, crowd out private investment and ultimately erode living standards.
“Substantial deficits projected far into the future could cause the market to rapidly lose confidence in the government’s creditworthiness, producing a spike in interest rates and fundamentally disrupting economic activity more broadly,” White House budget chief Peter Orszag said.
With interest payments on the debt growing without respite, future generations would have to pay for the lack of corrective action. That means higher taxes and fewer government services – and a potentially weaker economy.
The current mantra, mostly among Democrats, was that all options should be on the table, which signaled that politically toxic tax increases will be under consideration.
“I’m not going to say what’s in. I’m not going to say what’s out,” said Obama, who has promised repeatedly not to raise taxes on American families with incomes less than $250,000. “I want this commission to be free to do its work.”
It’s a task, though, that won’t be easy: Produce a deficit no bigger than $550 billion by 2015, an amount equal to about 3 percent of the total U.S. economy. That would require deficit savings in the range of $250 billion or more in 2015 alone.
The problem is too large to be handled with easy Washington chestnuts like cutting foreign aid and ending waste, fraud and abuse, undoing the Wall Street bailout or rescinding what remains of Obama’s $862 billion economic stimulus bill.
But summoning the political courage to propose, say, tax increases for a majority of Americans is far easier said than done.