The Hill | Jan. 25, 2010

From Afghanistan to China to Copenhagen, the actions of President Barack Obama have international significance. However, the greatest worldwide implications will stem from a domestic issue that he must not ignore: our nation’s mounting government debt. The U.S. has a debt problem, and the world is watching. The administration’s response will dictate not only the standard of living of future generations of Americans, but also their country’s global standing.

Just as the White House recently said that it would not have an open-ended commitment when it announced its new Afghanistan strategy, the United States cannot have an open-ended reliance on deficit finance. It needs a fiscal exit strategy that puts the budget on a sustainable path, keeps the economic recovery on track, and avoids a future fiscal crisis.

The budget problems are not brand new. Even before the economic downturn, the long-term trajectory showed a sharp rise in budget deficits as a share of the economy. But recent policy actions have expanded their size and accelerated their arrival. Under reasonable assumptions about what policymakers are likely to do on tax and spending policies in the next year or so, the nation’s public debt will likely be larger than that run up during World War II and will exceed the size of the economy in less than 15 years.

What are the global implications of spiraling U.S. debt? An ever-growing proportion of our debt must be sold outside U.S. borders and some international investors have publicly expressed concern about continuing to finance our spending. It was no accident that the issue of U.S. debt arose during President Obama’s recent trip to Asia. If international markets come to the conclusion that the United States cannot manage its debt, the U.S. will be unable to continue to borrow as freely, or cheaply, as it now does. The American economy could falter and U.S. securities could lose their value as investors flee to alternatives.

Policymakers should tackle this threat immediately.

The White House and Congress should commit to stabilizing the public debt (as a share of the economy) as quickly as feasible. That commitment, in and of itself, if credible, will reassure credit markets around the world that the U.S. is serious about getting in front of the debt threat. This will require that over the next year the administration and Congress craft a package of specific spending cuts and tax increases to achieve that goal. Democrats who are engaged in a spending spree won’t like to contemplate the former. Republicans who are traditionally averse to higher taxes will balk at the latter. Both need to place a higher weight on their obligations as guardians of the economic opportunities and living standards of future generations.

We recognize the need to balance fiscal responsibility and economic recovery, so the policies should be phased in as the economy recovers.

But other countries’ experiences have shown that a credible commitment to reducing debt can improve creditors’ expectations and diminish the risks of a debt-driven crisis while bolstering the economy. After an investment downgrade and debt of more than 100 percent of GDP in the 1990s, Canada implemented a plan that brought a decade of budget surpluses, and lowered its debt by around 40 percent of GDP by 2008.

The economies of Denmark, Sweden and Ireland were also improved simply through the implementation of a fiscal stabilization plan.

The United States can send a powerful message to the world that it can still exhibit leadership, tackle challenging problems, and bridge partisan divides to make politically unpalatable choices. Any meaningful effort to address the budget problems will have to be bipartisan and cannot be undercut by rigid stands on certain taxes or particular programs.

The possibility that future generations might be saddled with a lower standard of living and a much less-dynamic economy has moved from rhetorical scare tactic to frightening possibility. Without concrete action soon, this devalued bequest may also include a nation with greatly diminished global clout.

Copyright 2010, The Hill

iStock Analyst | Dec. 27, 2009

We all know about the current fragile state of the economy. What is quickly becoming evident is that our nation's longer-term fiscal picture is even more precarious because of mounting government debt and the unwillingness of our elected leaders to address it.

I've seen the results of economic crises first-hand and they are not pretty. I was the U.S. Ambassador to Mexico during the 1994 Mexican peso crisis. Mexicans' standards of living were cut in half overnight and now 15 years later the middle class still has not been fully repaired.

Before that, representing Oklahoma in the House of Representatives, I served as chairman of the Budget Committee during the turbulent economic period of the 1980s.

Those experiences convinced me that we must now realize that our nation's short-sighted fiscal policies leave us vulnerable to our own debt crisis. The federal debt is almost $8 trillion and rising. Without policy changes, it will climb to unsustainable levels and debilitate the economy.

Under reasonable assumptions, debt is projected to grow to 85 percent of gross national product by 2018, 100 percent by 2022, and 200 percent in 2038. That is a prescription for financial calamity. Eventually, investors will lose confidence in our ability to manage our finances and will not buy U.S. securities.

The likely results are higher interest rates, lower wages, and slower economic growth and job creation. That crisis would result in Americans being unable to find credit to purchase homes, buy cars or send their kids to college.

To avoid such a calamity, we require the sort of political courage that so far has been lacking in Washington. Several distinguished colleagues and I are serving on the bipartisan Peterson-Pew Commission on Budget Reform. We recently released a report, Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt, which details the coming debt crisis and proposes a six-step plan to address it.

The commission recommends that Congress and the President commit now to stabilize the debt at 60 percent of GDP by 2018, develop a credible package over the next year to attain that goal, begin phasing in the plan in 2012, implement a "debt trigger" automatic mechanism to ensure that the process stays on track, and continue to reduce the debt as a share of the economy after 2018. This is an ambitious, yet attainable, solution.

Our leaders face a great challenge but it is not insurmountable. We must be committed to reducing the debt. The longer we wait, the harder it will be on all of us and on our children and grandchildren.

Copyright 2009, iStock Analyst

Forbes | Dec. 21, 2009

Last week Bruce Bartlett devoted his Forbes column to criticizing plans for a budget commission to make recommendations on how to deal with the country's fiscal imbalances. This is the approach the White House and Congress seem poised to pursue to come up with the specific policies to put the nation's budget back on a sustainable path.

In making his case, Bartlett chose to take a number of swipes at our new report, Red Ink Rising, which calls for policymakers to commit to and develop a plan to stabilize the government's growing public debt at no larger than 60% of the economy by 2018.

The mission of the Peterson-Pew Commission on Budget Reform, made up of some of the most respected budget authorities in the nation, is to make recommendations to reform the country's outdated and ineffective budget process. We determined that the first step, given our horrid fiscal condition, is to develop a "fiscal goal" and put forth a framework to achieve it. (We will soon make further recommendations on more technical reforms such as budget baselines, government trust funds and new budget enforcement mechanism.)

We arrived at the 60% ratio because it reflects international standards at a time when one of the primary focuses of stabilizing the debt is to reassure foreign creditors that the U.S. continues to be a sound place to invest.

We picked 2018 because what was once a long-term fiscal problem, driven primarily by aging of the populating and growing health care costs, has become a more immediate problem exacerbated by the recent economic crisis. We now have to move more quickly. Waiting a full decade would have been risky, concerning the possibility of a fiscal crisis occurring before we stabilize the debt. However, we also recognized that acting too quickly could destabilize the budding economic recovery. So we attempted to balance both fiscal and economic considerations.

Some will say the goal it too aggressive, while others will complain it doesn't go far enough. Ultimately, Congress will have to decide whether our recommendations make sense. Bartlett's criticism however, comes a bit out of left field.

Bartlett argues that we failed because we didn't "put forward a serious, detailed plan for cutting the deficit that left no sacred cow unscarred." Well ... true ... we did not. But as Bartlett knows, because we talked about it over the telephone extensively before he published his article, we never intend to. Putting forth a budget plan of some type was not the purpose of our budget commission--not even close. It's like criticizing Bartlett's call for a value-added tax for failing to fix Social Security.

Red Ink Rising focuses on the first step in reforming the budget process during times of fiscal stress: setting a fiscal goal. Before our leaders can agree on the legislative specifics, they need to agree politically and publicly that debt reduction must be a national priority and that they need to set a specific national fiscal goal.

Sure, we could have put out a report calling for raising the retirement age, temporarily freezing discretionary spending, restructuring Social Security and Medicare, broadening the tax base, or creating a broad-based energy tax to deal with the nation's fiscal problems. The options that will be necessary are in fact well-known. Many of our members have been writing about them for years. There is no right or wrong answer for what combination the ultimate package will include. It will be the result of complex political negotiations. (We do show an illustrative budget of what it would take to achieve our proposed goal.)

But as we have seen in the past, getting prematurely specific is more likely to poison the debate then help. This has happened in presidential campaigns, for instance, where when the issue of raising the retirement age comes up candidates stumble all over themselves to promise they'll never do such a terrible thing (even though most experts agree it is in order given growing life expectancies). Most recently, when candidate John McCain suggested reforming the tax exclusion for employer-provided health insurance, candidate Barack Obama criticized it (again, even though almost all experts support the policy), and as a result the good idea was poisoned and left out of current health reform bills--an unfortunate outcome.

For the greatest chance of success, the right sequence is to first agree there is a problem and commit to a goal, and then to get specific.

Our report asks that we draw a "debt line in the sand" as a way to start discussing how our country must rebalance its spending and tax policies over the next decade. Once policymakers agree to a public fiscal goal and to debt reduction, we can move to a productive discussion of how to get there.

Copyright 2009, Forbes