In his testimony before the President’s fiscal commission, Barry Anderson discussed the characteristics of budget systems, the roles that fiscal rules can play, and how such budget structures have worked internationally—citing the experiences of Sweden and Switzerland.

The Peterson-Pew Commission on Budget Reform hosted a conference, “Avoiding a Government Debt Crisis,” on Tuesday, February 16 in Washington, DC. The event brought together a wide spectrum of economists, politicos and fiscal experts to discuss the nation’s fiscal plight and how to change course. The event was moderated by CRFB President, Maya MacGuineas.*

Peterson-Pew Commission co-chair and former Congressman Charlie Stenholm* opened the event by putting the situation in perspective. In noting that people like him have warned for years about the nation’s unsustainable fiscal path while “nothing seems to change except the problem gets worse” he also observed that the recent travails of the economy seem to have changed public perception and now Americans seem to realize that “America is not too big to fail.”

The first panel of the conference discussed the need for a shared fiscal goal and panelists expressed a great deal of agreement on the need for a target and what it should look like. Urban Institute fellow and former CBO director Rudolph Penner* explained why stabilizing the debt-to-GDP ratio was an appropriate target and referred to the goal of 60 percent of GDP recommended by the Peterson-Pew Commission and other groups. He also argued that Americans are currently not prepared for the necessary changes that will be required to reach that target.

John Podesta, president of the Center for American Progress, contended that the biggest obstacle is a lack of political will in Washington to make the tough decisions to stabilize the debt. He noted that there is “more agreement across the political spectrum on what the targets ought to be than there is the capacity of our political system to actually produce the results to reach those targets.” He observed the tension between the goals of spurring the economy in the short term while setting a credible path to sustainability in the longer term, and compared it to squeezing an aircraft carrier through the Panama Canal. He also said that statutory mechanisms to enforce fiscal discipline were vital.

Urban Institute president Robert Reischauer* saw a debt “trigger” that would take effect if annual debt targets are not reached as a promising mechanism. The Peterson-Pew Commission recommended a trigger that applies equally to spending cuts and tax increases in the report Red Ink Rising. He also made the point that we are handing our children and grandchildren a huge burden through excessive borrowing and warned that we risk becoming a “fiscal slave” to other countries. He said fiscal goals must be understandable, attainable, and flexible. He also detailed six steps to a fiscally sustainable path:

1.) convince the public and their elected representatives that something must be done;

2.) specify a goal;

3.) set a date for attaining the goal;

4.) establish benchmarks;

5.) create a mechanism to ensure progress towards achieving the goal;

6.) enforcement.

Douglas Holtz-Eakin,* president of the American Action Forum, said the need for a fiscal goal was “transparent” with our debt “endangering both our prosperity and our freedom.” According to Holtz-Eakin, a fiscal goal would make it easier for lawmakers to say “no” to the myriad of programs and initiatives they are asked to fund. He also agreed with earlier comments by Reischauer that the debt-to-GDP ratio is a difficult concept for Americans to understand and would require a great deal of educating the public. That sort of education would be critical to pressure policymakers to make the hard choices to put the U.S. on a sustainable fiscal path.

David Walker,* president and CEO of the Peter G. Peterson Foundation, also called for a fiscal goal, arguing that “A great nation does not remain great by being a debtor nation.” He also stated that the U.S. is at a “critical crossroads” in its history and that the decisions we make, and fail to make, within the next five years will largely determine our future. He warned that we face large, growing structural deficits that threaten our future; noting that in twelve years the biggest line item in the federal budget could be interest on the debt. Walker lambasted accounting practices that mask the true severity of the debt problem. He said that although high government borrowing has not yet caused interest rates to rise, the actions of our foreign lenders “speak loudly” – that they are purchasing shorter-term treasuries and looking at investments other than U.S. debt. Walker observed four parallels between the subprime meltdown and current government finances:

1.) a disconnect between who benefitted from the financial bubble and who paid the price;

2.) a lack of transparency;

3.) too much debt; and

4.) a failure of oversight and risk management.

He also noted two big differences: the sheer size of the current problem and that no one will bail out the U.S. He said that a fiscal commission is important and provided recommendations to ensure its success:

• everything must be on the table;

• it must engage and educate Americans outside the Beltway on the tough choices that are necessary and the consequences of inaction;

• it must set goals such as the debt-to-GDP ratio recommended by the Peterson-Pew Commission;

• it must include capable and credible members committed to bipartisanship and finding real solutions; and

• its recommendations must be acted on by Congress.

The next panel offered the international and market perspective on our unsustainable path and what the tipping point would be for a fiscal crisis. Martin Baily of the Brookings Institution observed that we have a broken political framework yet people still flock to U.S. treasuries. However bad the situation looks in the U.S., it probably looks better than other overseas economies, except for maybe China. Markets may be expecting a recovery in the U.S. that is stronger than in Europe, and there may be greater room to resolve the problem in the U.S. since we start with lower tax rates (we could institute a VAT tax, for example). Baily said global markets are a little bit more optimistic than some of the speakers alluded to. There is a tipping point, though people are not sure where it is. It would show up as higher interest rates and potentially a lower dollar. He hopes the U.S. learns that if we go too far, then the value of our debt starts to depreciate, and we should not push the envelope. We are in the hands of our creditors, but they are in our hands too. Nobody wants to see a collapse of the dollar and a lack of access to the U.S. dollar. The right debate is not being created by politicians around health care and other budget items, and until we get the right debate, no one will vote for politicians who will support the types of decisions that need to be made.

According to Richard Berner, Managing Director, Co-Head of Global Economics and Chief U.S. Economist, Morgan Stanley, investors understand we have a little time to do something about our budget, but they are alarmed when looking at deficits projected as far as the eye can see. They know there is no credible plan yet to grapple with the budget problem. Four fears investors have: inflation, factors that drive real interest rates, currency risk, and the risks associated with the uncertainty in financial markets. Inflation risk may show up in the United States. Factors that drive real interest rates – they are comparatively low to overseas markets and economies. There is a very real risk that real interest rates will go up. We cannot quantify political risk. We need solutions. He said the U.S. needs a credible plan for reducing the debt. He noted that he is a "card-carrying member" of the Committee for a Responsible Federal Budget's Announcement Effect Club, whose members believe that announcing a credible plan now to reduce the debt as the economy recovers will improve economic prospects in the short-run because creditors' fears will be allayed.  

Carlo Cottarelli, Director of the Fiscal Affairs Department at the International Monetary Fund, said the fiscal problems of the U.S. are common to most advanced countries. He said institutional reforms could be implemented now to reduce debt in the longer term. He and Berner agreed on the need for the U.S. to develop a credible plan now for reducing its debt. He referred to research showing that high debt can raise interest rates and lower economic growth. He argued against using inflation to lower the debt-to-GDP ratio. He said tough decisions on revenue and spending are needed.

A panel of respected political commentators then examined the political dimension. Atlantic Monthly senior editor Clive Crook contended that the public, and thus politicians, are not scared enough yet to address long term fiscal problem. Beginning longer-term planning now would actually help with shorter-term stimulus, but there is no long-term focus in the current debate.

Former Congressman Jim Kolbe* said there has never been such a toxic political environment in Washington. Dealing with our fiscal problems will be difficult in this atmosphere.

Norman Ornstein of the American Enterprise Institute agreed with Kolbe that Washington is more dysfunctional than ever. He also agreed that there is populist anger against those in power. He echoed Stenholm’s opening remarks that redistricting reform is needed to elect leaders willing to work together and address challenging issues. Bipartisanship, leadership and consensus are needed; currently none of those is evident.

Jamal Simmons, principal at the Raben Group, noted that politicians are not good at taking away things from voters. Elected officials only have negative examples of what happens when they make unpopular decisions. All the panelists agreed that everything, including entitlements and tax reform, should be on the table in confronting the debt.

Federal Reserve Bank of Kansas City president Thomas Hoenig, provided the concluding keynote address, forcefully arguing against having the central bank bail out the country by monetizing the debt (see a more detailed summary of Hoenig’s remarks here). In his remarks, titled “Knocking on the Central Bank’s Door,” Hoenig echoed the sentiments of other speakers at the forum that U.S. fiscal policy is on an unsustainable course. He said it is an ‘inescapable conclusion … that U.S. fiscal policy must focus on reducing the debt build up and avoid the consequences of not doing so.” But he contended that having the Fed print more money to purchase the mounting debt would lead to an inflation-induced financial crisis.

*Peterson-Pew Commission on Budget Reform commissioner

In a testimony before the Senate Budget Committee, former CBO Director and current Peterson-Pew Commissioner Rudy Penner argues for setting an explicit target for the government’s debt-to-GDP ratio. Penner runs through the risks of a high debt-to-GDP ratio and suggests that it should be brought down to 60 percent of GDP, and then stabilized or decreased further.

In a testimony before the Senate Budget Committee, former OMB and CBO Director and current Peterson-Pew Commissioner Alice Rivlin discusses the dangerous debt trajectory, the need to stabilize the debt at a certain level and by a specificied date, and the pre-requisites of developing a credible plan to stabilize the debt.

Star-Telegram | Dec. 28, 2009

Here in Texas, we have a saying: When you find yourself in a hole, the first rule is to quit digging.

As I learned from my 26 years in the House of Representatives, that’s not always easy advice to follow. Members of Congress like to deliver projects and programs back to their districts. And for a while, we were all told that deficits didn’t matter. As we’ve learned, they do matter. We may have not been able to avoid deficits in the past two years as the government tried to fix the economy, but I’m not worried about two years. I’m worried about the path that our debt is on, even after the economy gets better.

We’ve been on a path of reckless spending that seems never-ending. If only Congress and the White House could make changes like the folks in West Texas have had to do during this economic and financial crisis, then we could get out of our fiscal mess. The situation is bad and will only get worse if we don’t stop digging and do something.

If we do not lower our government debt, we will see interest rates go up, wages stagnate and our standard of living decline. Our grandchildren and their children will be left with the burden of paying for today’s borrowing and spending. This will mean large tax increases and large spending cuts.

The increased federal debt will make it more expensive to borrow for housing, education and business investments. If people are unable to borrow money, they will not be able to buy a new house or send the kids to college. It will really hit home for the American people when they go to the bank and cannot borrow any money. Or the interest rates will be so high that they can’t afford the loan. Higher interest rates will stop investment and hurt the creation of new jobs, something we desperately need.

While there is no silver bullet when it comes to fiscal responsibility, the bipartisan Peterson-Pew Commission on Budget Reform has come up with some reasonable targets. In "Red Ink Rising — A Call to Action to Stem the Mounting Federal Debt," a report we just released, we describe six steps to solving the debt problem.

We recommend that Congress and the White House develop a fiscal framework that includes promising to stabilize the public debt by 2018. The commission offers a path for getting there, annual debt goals with an enforcement mechanism and a plan to reduce the debt over the longer term. Waiting too long could fail to reassure our government’s creditors.

I’m a farmer in real life, and I understand that my banker has a lot to say about what we can or can’t do. As a former member of Congress who worked and, occasionally sparred, with both parties, I know that having this bipartisan group of policymakers agree on a plan is quite a feat. Enacting our proposal will be tough in this political climate. But it’s crucial that leaders in both parties make the tough choices. As elections approach, my Democratic and Republican friends in Congress need to remember that this is an issue for all Americans so that we can keep our standard of living and avoid a crisis.

Washington needs to commit soon to a clearly defined plan that changes the way it taxes and spends to show the world that the U.S. is serious about debt. Average citizens have tightened their own budgets and begun to live within their means, and now Congress and the White House have to follow suit. The public is ahead of the politicians on this one. As a farmer, I am an optimist. And I believe that policymakers can put aside their individual political interests to find a solution that is in the best interests of our nation and our children’s future.

Copyright 2009, Star-Telegram

The Hill | Dec. 18, 2009

At the same time he is weighing further economic stimulus plans, the President is also arguing for getting deficits under control. There is no question that the United States is on an unsustainable fiscal path. The large and growing federal debt looms over every legislative decision before Congress. This will be the case for years to come as our policymakers struggle to fund economic stimulus packages now or health care and the retirement costs of our aging population over the next two decades from revenue sources that will not grow nearly as quickly as those demands will. The consequences are serious for public policy, the economy, and the standard of living of the American people.

For the past year, along with our colleagues on the Peterson-Pew Commission on Budget Reform, we have wrestled with this critical issue — a federal debt that is out of control. The Commission members share a common concern: the fiscal future we leave to succeeding generations will lower their standards of living. It is our strong belief that we must take action now to prevent that from happening.

Even after the economy has recovered from the deep recession, structural deficits will remain. The debt is on course to reach levels never before experienced in the United States. While it was necessary to ramp up spending to respond to the recent sharp decline in the economy, the United States must adopt a plan to stabilize the debt immediately and take the first steps down that path very soon.

Under reasonable assumptions, debt held by the public is projected to grow steadily, reaching 85 percent of GDP by 2018, 100 percent by 2022, and 200 percent in 2038. 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.

On December 14, our bipartisan Commission presented a report containing recommendations for how lawmakers and the administration can tackle the debt – “Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt.” In the report, we recommend: that policymakers commit to a plan for stabilizing the public debt over a reasonable timeframe; specific policies to stabilize the debt; annual debt targets with an automatic enforcement mechanism to ensure targets are met; and that policymakers commit to reducing the debt level over the longer term.

But in short, we agree that any solution must include tough choices on both sides of the budget. Both tax increases and spending cuts will have to be part of the solution so everyone has skin in the game.

The biggest factor in whether Congress can succeed in this task is political will—members of all political persuasions will need to come together and make tough choices. Promises not to raise certain taxes or reduce certain benefits only stand in the way of a realistic plan. Any meaningful effort to address our fiscal problems will have to be bipartisan. Remember the public is ahead of us on the issue of fiscal responsibility. But we all have to join forces to get the tough job done.

Congress will soon, once again, raise the country’s debt limit so the lights can stay on through the holidays. Key senators are demanding the formation of a bipartisan fiscal task force to deal with our fiscal problems in exchange for their votes to raise the debt ceiling. Unfortunately, lawmakers have not yet come together in the face of international concerns about how the United States is dealing with its debt, and with average citizens across the country tightening their belts, to put together a fiscal management plan to secure our economic future.

Lawmakers can begin now to put such a plan in place. But they can phase-in the necessary revenue and spending changes starting in 2012 to allow the economy to recover and to give beneficiaries and taxpayers time to adjust to a tougher budget. Committing now to a fiscally-responsible future will show our international creditors that we are serious about getting our debt under control.

Republicans and Democrats alike need to accept that they will have to cut spending and raise taxes to bring our debt down to a manageable level. Everyone should have a stake in the outcome – skin in the game we like to say. If that happens, everyone can take the credit for leadership, and, more importantly, our children and grandchildren can reap the benefits.

Copyright 2009, The Hill

In Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt, The Peterson-Pew Commission on Budget Reform calls on policy makers to stabilize the national debt through a six-step plan. Crafted over the past year by former heads of the CBO, OMB, GAO, and the congressional budget committees, the plan reflects a bipartisan approach to avoiding the tremendous global risks of America's expanding debt, without destabilizing the economic recovery. Red Ink Rising is the first of two major reports to be released by the commission.