Deficits and Debt
Maya MacGuineas's Testimony Before the Fiscal Commission
Download this document
Chairman Bowles, Chairman Simpson, members of the Commission – thank you very much for the opportunity to appear before you today.
I am the president of the bipartisan Committee for a Responsible Federal Budget and the director of the Fiscal Policy Program at the New America Foundation. I also am part of the Peterson-Pew Commission on Budget Reform and a member of the Domenici-Rivlin Debt Reduction Task Force. Today, I will discuss a number of the outside initiatives that are underway to try to help change our nation’s fiscal future.
I know that all the members of this commission have been working incredibly hard scouring all areas of the budget for potential reforms to improve our fiscal future, and I thank you for all the effort that you are putting into this task.
If we don’t make changes to our debt trajectory, we will pay a heavy price through a weaker economy, a lower standard of living, less growth potential, a less flexible budget, and a loss of leadership in the world.
Just yesterday, the Congressional Budget Office released a report on federal debt and the risk of financial crisis. The document not only warns that debt levels are already quite high compared to historical levels, but that the debt is set to grow faster than the economy—forever. Future debt growth will be driven by higher government spending caused by the aging of the populating, escalating healthcare costs, and the biggest waste in the budget – spiraling interest payments (my words, not the ever-diplomatic CBO’s), and revenues that, even though they will be higher than historical averages, will not be high enough to pay for all the spending.
The CBO report focuses on the growing risk of a fiscal crisis if we do not change course. A crisis could take the form of a gradual rise in interest rates.
Or as we have seen in other nations, it could be startlingly abrupt, as investor concern suddenly grows over the risk of default or attempts to inflate our way out of our fiscal problems. No one knows at what point we would hit the tipping point. The Committee for a Responsible Federal Budget recently held an entire conference with some of the world's top financial and economic experts on the topic of what would cause a fiscal crisis and what exactly it would look like. There was nothing close to a consensus about what would kick off a crisis—only that we may well be dangerously close to finding out and that we’d rather not. Fears like these –which would have seemed so exaggerated in the past—now are disturbingly relevant.
Other than how much we should not want to find out what a fiscal crisis would look and feel like, there are a few main points I want to make today:
- We need fiscal goals for both the medium and long term
- We have to be cognizant of the sluggish economy as we proceed
- We should focus on policies that will help grow the economy
- Along with important work of the Fiscal Commission, there are many outside the group trying to develop ideas that will help lay the groundwork for, and dovetail with, whatever the commission comes up with.
I’ll focus on the Peterson-Pew Commission on Budget Reform, the National Research Council and National Academy of Public Administration’s “Choosing the Nation’s Fiscal Future,” and the still in-progress Domenici-Rivlin Debt Reduction Task Force.
By way of background, The Peterson-Pew Commission on Budget Reform is sponsored by the Peter G. Peterson Foundation and the Pew Charitable Trusts and its Members are those of the Committee for a Responsible Federal Budget—all the former directors of CBO and many of the formers heads of OMB, the budget committees and the Fed.
Last December the Commission released a six-step plan to stabilize the debt including:
Step 1: Commit immediately to stabilize the debt
Step 2: Develop a specific and credible debt stabilization package as quickly as possible
Step 3: Begin to phase in policy changes gradually in 2012;
Step 4: Review progress annually and implement an enforcement regime to stay on track;
Step 5: Stabilize the debt by 2018; and
Step 6: Continue to reduce the debt as a share of the economy over the longer-term.
The National Academy of Sciences/National Academy of Public Administration study was funded by the Macarthur Foundation. The co-chairs were John Palmer of Syracuse University and Rudy Penner, former CBO director, now with the Urban Institute. It was tasked with showing different comprehensive policy packages, reflecting different values, all of which would return the U.S. to a sustainable path.
Finally, the Domenici–Rivlin Debt Reduction Task Force hosted by the Bipartisan Policy Center is still at work. The groups is co-chaired by former Senate Budget Chairman Pete Domenici, and Alice Rivlin, formerly head of CBO and OMB, and vice chair at the Fed.
The Task Force is equally split between Republicans and Democrats—as well as a few Independents, of which I count myself as one. It will focus on debt reduction and stabilization. And our starting point is that everything is on the table. The report will be released this fall.
There also are many important outside engagement efforts as well, including the Concord Coalition and Dave Walker of the Peterson Foundation ’s “Fiscal Wake Up Tour,“ which holds Town Hall meetings across the country with the Heritage Foundation and the Brookings Institution, and the recent multi-city town hall hook-up convened by America Speaks. But I have been asked to focus on the outside policy and process efforts underway rather than engagement efforts.
We Need Both Medium and Long-term Fiscal Targets
In terms of a fiscal goal, it is actually quite remarkable how regularly US policymakers craft budgets without a specific goal in mind. It is like flying blind, yet the budget process does not require a goal or target to be the starting point of the process.
A fiscal goal has the advantage of helping policymakers say no, as in “I’d love to give you that shiny new spending program or that alluring targeted tax cut, but it will keep us from achieving our fiscal goal.”
It also allows us to make comparisons. For instance, say there is one politician courageous enough to lay out the specifics of how he or she would fix the budget. Without a goal, others can criticize the plan without offering a productive alternative. But if you have a common fiscal target, if you don’t care for those policies, you can show a different plan that achieves the same goal and allow a fair comparisons of the pros and cons of each approach. It helps bring back the basic notion of trade-offs to budgeting.
This commission has its specific goals which have been laid out for it, which focuses on the short-term target of 2015, and a more vague longer term objective. Specifically:
“The Commission shall propose recommendations to balance the budget, excluding interest payment on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers. In addition, the Commission shall propose recommendations to the President that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.”
The Peterson-Pew Commission has recommended a medium-term goal of stabilizing the debt by 2018 at 60%--a well-recognized international standard, which is important given the emphasis we must put on reassuring global credit markets. The Fiscal Future Committee, also chose this goal, with 2022 as the target year. And the Domenici-Rivlin commission has not settled on a specific goal, and nothing is decided until everything is decided, but some type of medium-term debt target appears to be likely.
Recently, the International Monetary Fund has pointed out that the goal cannot just include stabilizing the debt at post-crisis levels, but rather, must involve bringing it down to pre-crisis levels.
To achieve such a medium-term goal, all three commissions agree that a reasonable plan would be: Credibly commit to reforms as quickly as possible, and phase them in gradually in order to avoid derailing the economic recovery.
But this will not be enough. In order to reassure credit markets and help strengthen the economy, a longer-term plan also will have to be adopted to control federal spending, close the gap between spending and revenues, and alleviate the current uncertainty that confuses citizens and creditors about the direction of future fiscal policy.
Over the longer-term, Peterson-Pew also strongly advocates further gradually reducing the debt relative to the economy – closer to the historical average of below 40%– after 2018. The Fiscal Future Committee recommends policy changes to ensure that “revenues and spending are closely aligned”. The primary reason, other than economic, is to ensure that we have the fiscal flexibility in the future to respond to crises that inevitably will rise.
Both medium-and long-term fiscal targets are critical. They also may well require very different policies, with the medium term changes relying more on savings from discretionary programs—including both defense and domestic discretionary—and revenue changes, including everything from cutting tax expenditures to fundamental reform. The Wyden-Gregg plan is certainly one good place to look for ideas.
Both groups point out that in the longer-term, the bulk of reforms will have to come from programs related to the drivers of spending growth—the aging of the population and soaring health care costs—primarily government health care and retirement programs. Simply put, without changes in these areas of the budget, the debt cannot be stabilized.
These policy conclusions are borne out by the types of policies in The Fiscal Future Committee report as well as the illustrative budget blueprint developed for the Peterson-Pew Commission to show one way we might achieve the debt goal. They reflect the general desire by policymakers to make changes more gradually to entitlement program to allow people time to adjust, as well as the reality that that is the area of the budget where the long-term unsustainable growth comes from.
This is particularly relevant to the mission of this commission whose mission is to balance the primary deficit by 2015 which is assumed will stabilize the debt once the economy recovers. This will only be true if you address the unsustainable drivers of budget deficits; otherwise, the budget will again fall out of balance.
I would emphasize that though both medium- and long-term fiscal targets are needed, the exact target is far less important than coming up with significant improvements that show that we have the ability to change course and avoid the fiscal calamity we are otherwise headed for.
We all are aware of the political polarization that exists in this country, and one of the major concerns is that the two parties will not be able to work together to develop a fiscal roadmap to get us out of this mess. I hope this Commission proves doubters wrong. If this commission comes up with either a modest, or far better, a significant plan, it will go a long way toward reassuring our creditors that we will fix this situation before we are forced to.
I believe it is the hope of all the outside commissions that they will help pave the way to getting there by offering specific ideas and approaches.
Balancing Economic Recovery and Fiscal Consolidation
There are legitimate concerns that enacting a fiscal consolidation plan prematurely could derail the economic recovery. It is my personal belief that the economy still faces many challenges and that well-crafted stimulus measures – and I emphasize that – are in order—though I should state that my board of directors has mixed views about this.
However, we are now also experiencing the loss of fiscal flexibility that comes with high debt levels. Instead of just borrowing for stimulus, we should add stimulus measures as necessary and offset the costs of the measures over a longer period of time, so that the funds—whether for unemployment insurance, state and local governments, or business tax incentives—do not lead to more debt over the longer-term.
This also does not mean that there is no room for some tax increases or spending reductions this year or next if they affect areas that are not particularly stimulative. Allowing the tax cuts for the well-off to expire for instance, or cutting wasteful or ineffective programs out of the budget, is unlikely to harm the recovery while cutting unemployment insurance, aid to states or raising payroll taxes probably would. Removing non-stimulative programs is more likely to aid the recovery by showing markets that we are indeed serious about making the changes we need to the budget. A down payment on a full package will be very important in reassuring markets and the public—which will help improve consumer confidence.
Importantly, just committing to a credible fiscal consolidation plan right now, even if the policies are not phased in for a few more years, can help the recovery. The so-called “Announcement Effect” can reassure investors and help keep interest rates from rising as they otherwise might due to all the debt, as the economy starts to recover. We have seen this in other countries, such as Denmark and Ireland in the past.
For these reasons again, both the Peterson-Pew and the Fiscal Future Committee recommend committing to changes immediately, while actually implementing them more gradually. Given where the economy was at the time the reports were produced, both recommended phasing in very small changes starting in 2012, with the savings growing quickly each year thereafter as the economy strengthens.
The question is: What would constitute a credible commitment? It will take more than a promise.
For a plan to be credible, and for our creditors to buy it, it will have to be statutory, specific, bipartisan, and transparent to public. It should be put in law immediately with the policies slated to phase in as gradually as necessary. The specific policies in the plan must be developed now, not just filled with magic asterisk. The plan has to be bipartisan. The necessary policy changes will be too difficult if either party tries to do this alone. Moreover, if something is pushed through by one party alone, and is met with calls to repeal it, it will undermine confidence that the plan will stay in place. Finally, the public has to understand the plan, be on board, and hold politicians accountable for staying on track. This kind of public commitment has been very helpful in other countries.
One look at the levels of debt we now face should remind all of us that the current favorable interest rate environment could change at any moment and investors could turn on a dime. Stimulus is easy – it involves tax cuts and spending increases – the stuff politicians like. It is the reverse—the fiscal consolidation part—that policymakers do their best to avoid and that is one of the many reasons all these outside groups are pushing that it not be sidelined even as the economy recovers slowly.
Specific Policy Ideas
Moving on to specifics, The Fiscal Future Committee developed four illustrative paths that would achieve its goals.
The low spending and revenue plan would maintain revenues at traditional levels and rely on large spending cuts to all areas of the budget. It would shift responsibilities to households and state and local governments. It would balance Social Security by increasing the retirement age, progressive price indexing, and changing COLAs. And it would limit excess health care cost growth to aging of population. Investments would probably be detrimentally low in this option.
The high spending and revenue plan would only restrain growth of Medicare and Medicaid spending slightly, maintain currently scheduled Social Security benefits, and permit expanded spending on defense and other domestic programs. It would require very substantial increases in revenues. The Commission thus looked at alternative tax structures, including a radically reformed income tax that limits many tax expenditures and consolidates tax rates, and a VAT. It also assumed a dramatic increases in payroll taxes.
Between these two, the commission provides two intermediate paths, which fall between these two “bookends”.
The Domenici-Rivlin Task Force is still working, and again nothing is decided until everything is decided, but I can say the Task Force will recommend a specific set of reforms with the goals of:
- Making Social Security solvent for 75 years
- Reigning in growing health care costs
- Limiting growth in other entitlement programs, including reforms to civilian and military retirement and farm programs
- Looking at possible freezes in discretionary spending
- Dramatically simplifying the tax code and considering a range of other revenue options
Last month, when I appeared before the Commission, we were asked to provide specific ideas for reducing the deficit. I submitted a plan, which represents my own views, not necessarily those of my board members. It is not presented as the perfect plan, but hopefully as a helpful example of the types of policies that will be necessary to reach a credible target. (Appendix 2)
The Peterson-Pew Commission also developed an illustrative plan of how to stabilize the debt at 60% by 2018, which can be found here. http://budgetreform.org/document/budget-blueprint-paths-60-percent
Some of the major policy conclusions of the groups so far include:
- Entitlement growth will have to be controlled
- You can not get to any reasonable goal without new revenues
- All discretionary spending – including defense -- will have to be part of a plan
- Fundamental tax reform is desirable, and even more so if and when revenues go up.
In developing specific proposals, the groups also recognize and acknowledge the need to deal with the black holes in the budget – the policies that are different in the budget than they will be in reality. So for instance, these groups – or any developing a budget plan – have to deal with fixing the AMT and the Sustainable Growth Rate once and for all. The expiring tax extenders that also are always renewed have to be addressed. I would assume this commission should hold itself to that same standard and deal directly with these parts of the fiscal challenges, as well as not assuming new policies assumed to expire that really are not intended to.
The Importance of Economic Growth
This budget challenge cannot be viewed as an exercise in merely getting the numbers to add up. We have to be conscious of the most important national priorities, and the effectiveness of government activities.
And we have to pay particular attention to the economic effects of various policy choices. Economic growth will not be able to fix our fiscal problems, but without it, they will be ever so much harder to solve. Our current budget—fraught with short-termism—over-emphasizes consumption and under-invests. We tax the things we want more of—like work—and less of the things we want less of—such as pollution.
There is plenty of room for improvement along with rebalancing. Cutting out wasteful, inefficient and redundant programs is an obvious first step. Shifting our spending from consumption to investment-based programs will have medium-and long-term benefits for the economy. Fundamental tax reform—with a strong emphasis on broadening the base by reducing tax expenditures, will be essential.
So where do we go from here? The Domenici-Rivlin group plans to release our report this fall. I dare say it will be full of specific policies that reflect the kinds of tough choices we have to make to set the country on a better path.
Peterson-Pew is now working on a companion proposal, to be released this fall. In this volume, we will focus on a number of budget process changes including instituting fiscal targets committed to by both the White House and Congress, along with annual debt targets to provide a glide path to the stabilization goal. Additionally, we will recommend a long-term target that will bring the debt down further, yet be flexible enough to accommodate economic cycles and emergencies.
The commission is leaning towards an enhanced use of automatic budgetary triggers which would be used to keep policymakers on track in coming up with budget plans to meet their fiscal goals and then staying on track once they are in place.
And finally, the report will include a number of improvements to the budget process to make the process more transparent to 1) reduce short-term budgeting, 2) highlight budget trade-offs, and 3) improve fiscal outcomes
I will end by saying there are an infinite number of ways to achieve the fiscal goals we are examining. The Committee for a Responsible Federal Budget has developed a Stabilize the Debt simulator as part of the Peterson-Pew effort, which allows people to pick the policies they would use to get there. http://crfb.org/stabilizethedebt/ (I have brought each of you your own personal simulator you can play in your office.) The results have been gratifying. People are willing to make the tough choices. We are tracking the results to share with policymakers and the public, and there are 35 options –totally about $600 billion in savings in 2018, that have received over 50% support. Not bad.
The point is that the requisite changes are large and tough. But the public appears willing to make them. Thus while the task before this commission is incredibly hard, and ironing out the different values and priorities of the members is a true challenge, voters appear ready to sign on, and it is without question what we have to do for the sake of the future economic well-being of the country.
All of the outside groups I mentioned today—as well as many others—stand willing to assist in any way we can. You have been given a large, and exceedingly important task. Given our debt trajectory, developing a plan to address it is the single most important thing we must do to assure the long-term strength of our economy and well-being for future generations. Thank you for your work on this important task.
Barry Anderson's Testimony Before the Fiscal Commission
Download this document
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.
Op-Ed: Does Congress Have the Will to Tackle to Debt?
Roll Call | March 9, 2010
On a bitter winter night 40 years ago, a British trawler caught in a North Sea gale hundreds of miles from help was accumulating ice on its deck and rigging faster than the crew could chop it away. Soon water flooded the engine room, leaving the boat with only emergency power. In the hour before the vessel sank, a Royal Air Force radio operator made contact and asked: “What are your intentions?” The final transmission came slowly: “No intentions.”
Many seasoned observers are now beginning to worry that Congress is on the verge of a “no intentions” response to the threat of financial crisis from our growing indebtedness. In recent weeks, the Senate was unable to muster the votes needed — including those of many original supporters — to adopt the Conrad-Gregg proposal for a bipartisan commission to develop specific policy changes for deficit reduction. Other amendments intended to scale back the growing hole in the budget also failed to pass. Only a statutory pay-as-you-go proposal, laden with exceptions for expiring tax cuts and a free pass for payments to Medicare providers, won Senate approval.
At the same time, the public is growing increasingly concerned about the country’s fiscal future. In the face of deeply troubling projections of federal debts, a clear majority in recent polls has rated deficit reduction a “major priority.” The Peterson-Pew Commission on Budget Reform and other groups have warned that the U.S. faces an increasing risk of debt-driven fiscal crisis that could trigger a double-dip Great Recession. The commission’s December report also described the economic benefits of a federal commitment to stabilize the growth of the debt by 2018. Those benefits — a lower path for interest rates and a stronger dollar — could be captured without endangering the economic recovery, if the government could commit to stabilizing the debt and enact changes in policy now to become effective only as the economy strengthens.
The threat to the U.S. economy is not only that we will run up against a critical tipping point of debt to national income that will suddenly send us into economic decline. There is also a gnawing fear that the U.S. may have lost the political capacity to act in its own interest. To many Americans, the federal government appears increasingly dysfunctional.
The current lack of Congressional resolve and action is not due to a shortage of policy solutions that could correct the fiscal imbalance. To the contrary, many think tanks and public interest groups are busily turning out reasonable solution packages. Evidence of the willingness of our elected leaders to act now is the missing and desperately needed ingredient.
Make no mistake: The government of the United States faces a risk to its global credibility. Defusing that risk requires constructive action, and Congress should take a first step soon. A logical and important place to begin would be for Congress to express its common commitment to a bipartisan goal of reducing the debt over the medium term, as the economy strengthens.
For instance, the leadership could introduce and take up in short order a resolution that adopts medium-term fiscal targets and directs the Budget Committee to report a 2011 budget resolution consistent with that target.
A fiscal target could be designed in a number of ways. The Peterson-Pew Commission on Budget Reform recommended that Congress aim to bring federal debt down to 60 percent of gross domestic product over a multiyear period, a target that was endorsed by the National Academy of Sciences and National Academy of Public Administration. Others have suggested alternative targets that could also put the budget on a sustainable track.
We sail toward troubled waters as a result of a chosen course that ignored the dangers of an exploding federal debt. But even now, help is within reach. We need only find the will and the united resolve to make the first turn toward safe harbor.
Event 2/16: Avoiding a Government Debt Crisis
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
Testimony: Choosing the Nation's Fiscal Future
Download this document
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.
Testimony: Moving to a Fiscally Sustainable Budget
Download this document
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.
Testimony: Setting and Meeting an Appropriate Fiscal Target
Download this document
In a testimony before the Senate Budget Committee, Maya MacGuineas argued for the need to pick a fiscal goal, how to think about the right policies to achieve that goal, and the consequences of failing to act.
Press Release: Latest Warning on Nation's Credit Risk Reinforces Peterson-Pew Commission Recommendations
Download this document
Last week, Moody’s Investor Services issued an unsettling warning that the nation’s triple A credit rating could be at risk unless improvements to the nation’s fiscal trajectory are made. The Peterson-Pew Commission recommends that Congress and the White House adopt an ambitious but achievable target that would reduce the public debt.
