National debt seen heading for crisis level

San Francisco Chronicle (Link) - Carolyn Lochhead (April 5, 2010)

Health care may have been the last big bang of the Obama presidency.

With ferocious speed, the financial crisis, recession and efforts to combat the recession have swung the U.S. debt from worrisome to ruinous, promising to handcuff the administration.

Lost amid last month�s passage of the new health care law, the Congressional Budget Office issued a report showing that within this decade, President Obama�s own budget sends the U.S. government to a potential tipping point where the debt reaches 90 percent of gross domestic product.

Economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University have recently shown that a 90 percent debt-to-GDP ratio usually touches off a crisis.

This year, the debt will reach 63 percent of GDP, a ratio that has ignited crises in smaller wealthy nations. Fiscal crises gripped Canada, Denmark, Sweden, Finland and Ireland when their debts were below where the United States is shortly headed.

Japan�s debt is much higher, but most of it is held domestically, and Japan�s economy has been weak for 20 years. �I really don�t think we want to be like Japan,� said UC Berkeley economist Alan Auerbach.

One advantage the United States has - and it is a big one - is that it issues the world�s reserve currency and so can print dollars to service its debt.

The Obama budget will add $10 trillion to the national debt in the next decade and will not stabilize the deficit, the CBO found. Deficits are expected to dip as the recovery takes hold, but never below $724 billion a year. Interest costs alone will consume $5.6 trillion this decade. A balanced budget has been widely ruled out as unattainable.

�The real problem is not just current deficits but where we�re heading,� Auerbach said. �We�re on a trajectory where the deficit�s going to go down a little and then go up again. And we have no solution for that.�

Deficits won�t reverse

No one is advocating big tax increases or spending cuts before a recovery takes hold. The problem is that deficits will not reverse even after a full recovery.

Credit rating agency Moody�s warned last month of a possible downgrade in U.S. Treasury debt. This year, Social Security is crossing a long-feared milestone at which it is paying more in benefits than it receives in payroll taxes. Study after study in the last year has raised alarms.

�In my judgment, a crisis could occur next week or 10 years from now,� said Rudolph Penner, an Urban Institute economist who co-chaired a huge budget report sponsored by the National Academy of Sciences and the National Academy of Public Administration. �I don�t really think we can go much beyond 10 years.�

Polls show rising public alarm - and public refusal of specific spending cuts or tax increases required to change course. A Field Poll last month showed most Californians do not want to cut the largest parts of the state budget, such as education or transportation.

The polling firm Democracy Corps recently warned Democrats that the deficit now tops unemployment as a voter concern. But it also found voters �unenthusiastic� about the options to close the deficit. Voters overwhelmingly prefer spending cuts to tax hikes but reject cutting specific programs.

Republicans promise to make deficits a premier political issue. But during the health care debate, they opposed any cuts to Medicare, the chief source of rising deficits. They also oppose tax increases and defense cuts. In January, they sabotaged rare bipartisan legislation to create a powerful deficit-reduction commission that would have forced action.

Stabilizing the debt without raising taxes, cutting Medicare or defense, or defaulting on the debt would eviscerate everything else, from the Border Patrol to highways. Earmarks constitute a pittance.

The numbers don�t add up for Democrats either. For all their railing against the Bush tax cuts that contributed to the current dilemma, Obama intends to extend almost all of them. That will cost $2.5 trillion, said the Committee for a Responsible Federal Budget. Obama also escalated the war in Afghanistan.

And he joined Republicans in sabotaging the deficit commission by creating a substitute commission by executive order that seems designed to fail. It cannot compel action, and its recommendations are postponed until after the November election.

Consensus difficult

Obama and party leaders stacked it with partisans, from Rep. Jeb Hensarling, R-Texas, to Andrew Stern, head of the Service Employees International Union, making it difficult to get the 14 out of 18 votes required to agree on anything.

The executive order is a study in artfulness. It calls for a deficit target in 2015 that will be largely reached through the recovery and opens a wide escape hatch by saying decisions are contingent on the economy.

Democrats are already picking off low-hanging, deficit-reduction fruit to increase spending instead. Led by Rep. George Miller, D-Martinez, Democrats approved $61 billion in savings last week by cutting banks out of student lending - and used it to expand aid to students and colleges.

Democrats often give the impression that taxes on the rich can fix everything. But the center-left Tax Policy Center ran simulations showing that Obama�s budget would have to raise $775 billion in new taxes every year to stabilize deficits at 2 percent of GDP. That means that if Obama keeps his promise not to raise taxes on the middle class, the rich would pay 90 percent of their income in taxes, the center said.

Obama �promised to be honest with the public, and he has a talent for doing so,� said Maya MacGuineas, president of the moderate Committee for a Responsible Federal Budget. �Yet he hasn�t used it yet to describe what types of hard choices will be involved.�

Soaring levels of debt