Monday, December 14, 2009

The public debt of the United States is rising at such a rapid clip that it threatens to plunge the nation into a crisis unless Congress and the White House reverse course over the next couple years, a blue-ribbon commission of fiscal experts warned Monday.

In the past year alone, the U.S. public debt level soared from 41 percent of gross domestic product (GDP) to 53 percent. The debt is projected to increase steadily, reaching 85 percent of GDP by 2018, 100 percent by 2022 and 200 percent in 2038, the Peterson-Pew Commission on Budget Reform reported in cooperation with the Committee for a Responsible Federal Budget.

“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.” The 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.”

Previously, the public debt peaked at 109 percent of GDP at the end of World War II. As recently as 1981, the public debt 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 baseline.

A combination of population aging 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 baseline. By 2018, interest costs will reach 4 percent of GDP, compared to just above 1 percent today.

The Peterson-Pew commission recommends that Congress and President 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 increases 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,” Mr. Jones said.

In 1970, foreign investors held only 5 percent of the $283 billion in U.S. public debt. Today they own nearly half of America’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 Holtz-Eakin, a former director of the Congressional Budget Office (CBO) who later advised John McCain’s 2008 presidential campaign. 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 America’s largest foreign creditor.

“This is about our freedom,” warned Jim Nussle, the Republican who formerly chaired the House Budget Committee and served as director of the White House Office of Management and Budget 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.

Said Mr. Holtz-Eakin: “What used to be a three-decade problem has now become a one-decade problem.” Asked what makes this fiscal crisis different from previous fiscal problems, Alice Rivlin, the founding CBO director who served as OMB chief in the Clinton administration, 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 scholar who noted that “the long-run deficits are not being driven by military spending.” If the White House doesn’t begin taking big steps, Ms. Rivlin said, congressional Democrats “will get killed in the next election.” Developing a credible debt-stabilization package with Congress would be “a preventive antidote to a landslide” by Republicans in the 2010 election, Ms. Rivlin said.

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