A bipartisan commission of fiscal analysts warned Monday 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 crisis 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 Monday 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 Monday called on Mr. Obama to veto the $1.1 trillion catchall spending bill Congress sent the White House this weekend, 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. “Its 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 middle-class 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 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,” said Mr. Jones, who also is a member of the group that issued Monday’s 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 three-decade problem has now become a one-decade problem,” Mr. Holtz-Eakin said.
Mr. Nussle and Mr. Holtz-Eakin 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.