U.S. red ink flirts with cri­sis, panel warns Dire pro­jec­tions put pub­lic debt at 200 per­cent of GDP by 2038

The Washington Times Weekly - - National - BY DAVID M. DICK­SON

A bi­par­ti­san com­mis­sion of fis­cal an­a­lysts on Dec. 14 warned that the U.S. pub­lic debt is pil­ing up so rapidly that it threat­ens to plunge the na­tion into cri­sis if Congress and the White House do not re­verse course within two years.

In the past year alone, the U.S. debt level soared from 41 per­cent of gross do­mes­tic prod­uct (GDP) to 53 per­cent, said the re­port by the Peter­son-Pew Com­mis­sion on Bud­get Re­form, pre­pared in co­op­er­a­tion with the Com­mit­tee for a Re­spon­si­ble Fed­eral Bud­get.

The group com­prises for­mer mem­bers of Congress, in­clud­ing co-chair­men Bill Fren­zel, Tim Penny and Char­lie Sten­holm, as well as for­mer heads of the Of­fice of Man­age­ment and Bud­get, the Con­gres­sional Bud­get Of­fice, the Gov­ern­ment Ac­count­abil­ity Of­fice and other fis­cal an­a­lysts.

The group said the debt is pro­jected to rise steadily, reach­ing 85 per­cent of GDP by 2018, 100 per­cent by 2022 and 200 per­cent in 2038.

“How­ever, be­fore the debt reached such high lev­els, the United States would al­most cer­tainly ex­pe­ri­ence a debt-driven cri­sis — some­thing pre­vi­ously viewed as al­most un­fath­omable in the world’s largest econ­omy,” the com­mis­sion con­cluded in its re­port, “Red Ink Ris­ing: A Call to Action to Stem the Mount­ing Fed­eral Debt.”

Wor­ries about the debt also could cre­ate po­lit­i­cal prob­lems for the gov­ern­ing Democrats be­fore any eco­nomic cr isis emerges.

A Gallup Poll con­ducted last month found that just 31 per­cent of Amer­i­cans think Pres­i­dent Obama is able to con­trol fed­eral spending, down from 52 per­cent one a year ago.

Those doubts were but­tressed by re­ports Dec. 14 that Demo­cratic leaders in Congress are mov­ing to raise the $12.1 tril­lion debt ceil­ing by $1.8 tril­lion to cover in­creased fed­eral bor­row­ing.

If the White House doesn’t be­gin tak­ing big steps, con­gres­sional Democrats “will get killed in the next elec­tion,” said Alice Rivlin, the found­ing di­rec­tor of the Con­gres­sional Bud­get Of­fice who headed the Of­fice of Man­age­ment and Bud­get (OMB) in the Clin­ton ad­min­is­tra­tion. De­vel­op­ing a cred­i­ble debt-sta­bi­liza­tion pack­age with Congress would be “a pre­ven­tive an­ti­dote to a land­slide” by Repub­li­cans in the 2010 elec­tion, said Ms. Rivlin, a mem­ber of the group that is­sued the re­port.

A Se­nate Demo­crat on Dec. 14 called on Mr. Obama to veto the $1.1 tril­lion catchall spend- ing bill Congress sent the White House, say­ing the pres­i­dent must “take the credit card away from the politi­cians who just want to spend, spend, spend.”

Sen. Evan Bayh of In­di­ana said that Mr. Obama didn’t cre­ate the spending cri­sis, but he chal­lenged the pres­i­dent to clean it up.

“I would hope the pres­i­dent would veto this bill,” he said. “It´s bad for our coun­try´s fi­nances. It´s bad for our chil­dren be­cause we are go­ing deeper into debt to China. It sets a ter­ri­ble ex­am­ple by show­ing that politi­cians are to­tally out of touch with the sac­ri­fices mid­dle­class Amer­i­cans are mak­ing.”

The Peter­son-Pew re­port warned that “a loss of con­fi­dence by in­ter­na­tional cred­i­tors could pre­cip­i­tate a fi­nan­cial cri­sis.” It also de­clared that “the grow­ing debt will jeop­ar­dize the Amer­i­can liv­ing stan­dard and U.S. eco­nomic lead­er­ship.”

The pub­lic debt peaked at 109 per­cent of GDP at the end of World War II. As re­cently as 1981, it had de­clined to 26 per­cent of GDP.

The an­nual bud­get deficit, which hit a post­war peak of 9.9 per­cent of GDP in fis­cal 2009, will fall be­low 6 per­cent over the next five years but then rise above 16 per­cent in 2038, ac­cord­ing to the com­mis­sion’s fis­cal base line.

The com­bi­na­tion of an ag­ing pop­u­la­tion and grow­ing health care costs will cause an “un­prece­dented ex­pan­sion” of Medi­care, Med­i­caid and So­cial Se­cu­rity, which to­gether will rise from less than 8.5 per­cent of GDP to­day to 17 per­cent in 2038, ac­cord­ing to the com­mis­sion’s base line. By 2018, in­ter­est costs will reach 4 per­cent of GDP, com­pared with just above 1 per­cent to­day.

The Peter­son-Pew com­mis­sion rec­om­mends that Congress and Mr. Obama de­velop a spe­cific and cred­i­ble debt-sta­bi­liza­tion pack­age in 2010 to limit the debt to 60 per­cent of GDP by 2018. The pack­age, which al­most cer­tainly would have to in­clude a com­bi­na­tion of tax in- creases and cuts in pro­posed spending, would be­gin to be phased in dur­ing 2012. If an an­nual debt tar­get was missed, “debt trig­gers,” in­clud­ing au­to­matic spending cuts and tax in­creases, would take ef­fect, ac­cord­ing to the com­mis­sion’s plan.

Un­less cor­rec­tive action is taken quickly, the cri­sis “will likely come from in­ter­na­tional sources,” said com­mis­sion mem­ber James Jones, a for­mer Demo­cratic chair­man of the House Bud­get Com­mit­tee who later served as am­bas­sador to Mex­ico dur­ing the 1995 peso cri­sis. “Mex­ico still hasn’t re­cov­ered from the 1995 peso de­val­u­a­tion caused by a lack of con­fi­dence in its gov­ern­ment,” said Mr. Jones, who also is a mem­ber of the group that is­sued the Dec. 14 re­port.

In 1970, for­eign in­vestors held only 5 per­cent of the $283 bil­lion in U.S. pub­lic debt. To­day, they own nearly half of the na­tion’s $7.7 tril­lion pub­lic debt. The fed­eral gov­ern­ment’s gross debt, widely re­ferred to as “the na­tional debt,” to­tals $12.1 tril­lion and in­cludes $4.4 tril­lion that the gov­ern­ment has bor­rowed from it­self, mostly from the So­cial Se­cu­rity trust fund.

“We should be united around the fear of China as our banker,” said Dou­glas J. Holtz-Eakin, a for­mer CBO di­rec­tor who later ad­vised the 2008 pres­i­den­tial cam­paign of Sen. John McCain, Ari­zona Repub­li­can. China’s hold­ings of U.S. Trea­sury se­cu­ri­ties have soared from less than $80 bil­lion in 2002 to nearly $800 bil­lion in Septem­ber 2009. China is now the largest for­eign cred­i­tor for the U.S.

“This is about our free­dom,” said Jim Nus­sle, who was chair­man of the House Bud­get Com­mit­tee and OMB di­rec­tor dur­ing the Ge­orge W. Bush ad­min­is­tra­tion. “You will be less free if we don’t deal with this prob­lem and deal with it as soon as pos­si­ble,” Mr. Nus­sle said at a round­table dis­cus­sion at the Na­tional Press Club on Mon­day.

“What used to be a three­decade prob­lem has now be-

“We should be united around the fear of China as our banker,” said Dou­glas J. Holtz-Eakin, a for­mer CBO di­rec­tor who later ad­vised the 2008 pres­i­den­tial cam­paign of Sen. John McCain, Ari­zona Repub­li­can. China’s hold­ings of U.S. Trea­sur y se­cu­ri­ties have soared from less than $80 bil­lion in 2002 to nearly $800 bil­lion in Septem­ber 2009. China is now the largest for­eign cred­i­tor for the U.S.

come a one-decade prob­lem,” Mr. Holtz-Eakin said.

Mr. Nus­sle and Mr. HoltzEakin helped pro­duce the Peter­son-Pew re­port.

Asked what makes this fis­cal cri­sis dif­fer­ent from pre­vi­ous fis­cal prob­lems, Ms. Rivlin said, “It is the ur­gency of the prob­lem and the shift in fo­cus from the [bud­get] deficit to the pub­lic debt,” which es­sen­tially rep­re­sents the ac­cu­mu­la­tion of all pre­vi­ous bud­get deficits and sur­pluses.

“The debt-to-GDP ra­tio has been moderate un­til re­cently” but is now poised to ex­plode, said Ms. Rivlin, a Brook­ings In­sti­tu­tion scholar who noted that “the long-run deficits are not be­ing driven by mil­i­tary spending.”

The Peter­son-Pew Com­mis­sion on Bud­get Re­form be­gan in Jan­uary as a part­ner­ship of the Pew Char­i­ta­ble Trusts and deficit watch­dogs the Peter G. Peter­son Foun­da­tion and the Com­mit­tee for a Re­spon­si­ble Fed­eral Bud­get. The group was formed to make rec­om­men­da­tions for how best to im­prove the na­tion’s fis­cal fu­ture and how best to strengthen the fed­eral bud­get process.

AS­SO­CI­ATED PRESS

‘Politi­cians are to­tally out of touch with the sac­ri­fices mid­dle-class Amer­i­cans are mak­ing’: Sen. Evan Bayh, In­di­ana Demo­crat

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