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Tag Archives: Debt

A couple of weeks ago, I had the pleasure (based on the fellowship, not the subject matter) of speaking at the annual Economic Summit of the Dallas Regional Chamber about the budget problem.  There were so many written questions submitted for the discussion period at the end of the session that the moderator could feed in only a few.  Briefly this week, I would like to try to answer one question that did not come up during that discussion.  In a later entry or entries, I will try to do some more.

This first question is one that I have heard occasionally, but which has never been addressed actually to me.  It goes something like this:  What would be worse, a federal government default, or running up this enormous debt to pass on to future generations?

My answer, which I perceive from the question would come off as contrarian, would be “default.”  It probably will require some explanation.

(To clarify terminology at the outset:  The written question used the term “default,” as I suspect did I in the oral presentation.  There are strong differences of opinion about the precise meaning of that term.  Some believe that only the failure to pay principal or interest on a debt would qualify as “default;” others would say that it means simply failing to pay all of your bills in full and on time.  Trying to respect these differences in the following discussion, let me confess that I fall into the latter camp.)

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There is no live option.  In fact, all the options are dead on arrival.  At this moment, there is no politically viable idea for addressing the nation’s looming budget problem.

So in a world of dead options, the task is to find the option that is least dead, and pump some life into it.  That is why, several months ago, CED suggested the strategy of “saving Social Security first” [see here for a blog post on this topic, and here for a statement from CED’s Trustees] to begin the difficult process of turning the nation’s rising debt burden around.

With the recent release of the revised budget outlook by the Congressional Budget Office (CBO), Washington’s interest in hard choices has waned even further.  The deficit is projected to decline in dollar terms for two more years; the debt will fall as a share of the GDP from 2015 through 2018 – that is, until three elections cycles from now.  The mentality of the body politic is to ignore such a long-term issue.  After all, it might just go away.

So this blog post will put these two factors together.  The budget problem is in remission, but not cured; and that makes the approach of fixing Social Security as a first step even more appropriate.

So point one:  Why should the nation still be concerned about fiscal responsibility, even after CBO reduced its estimates of future deficits?  Here are three simple reasons:

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Over the last few years, both parties have worked together to reduce the deficit by more than $2.5 trillion – mostly through spending cuts, but also by raising tax rates on the wealthiest 1 percent of Americans. As a result, we are more than halfway towards the goal of $4 trillion in deficit reduction that economists say we need to stabilize our finances.

President Barack Obama
The State of the Union Address
February 12, 2013

Many years ago, a seasoned Capitol Hill professional cautioned me about giving any questionable number to a politician.  Many have fly-trap minds, and once you put something in, you never can get it out.  Any nuanced but only partially understood fact, like a discount-store blowtorch, could be misused with considerable ill effect at some later moment.

This bit of wisdom comes quickly to mind when one hears the current buzz about a mere $1.5 trillion of deficit reduction over ten years ending our budget woes.  Some reach that number by the roughest of arithmetic; others use more sophisticated analysis, and even provide important and subtle caveats.  But the number, even though it has some limited use, already has left the corral of qualification and analysis far behind.

The simple way to reach that number is the way the President did.  Three years ago, Erskine Bowles and Alan Simpson characterized our fiscal plight with a calculation that $4 trillion of deficit reduction would “stabilize the debt.”  As the President noted in his remarks, some have estimated subsequent budget action to have achieved $2.5 trillion of that.  $4 trillion minus $2.5 trillion equals $1.5 trillion, under either OMB (Office of Management and Budget) or CBO (Congressional Budget Office) scoring.

That little inside-Washington joke is not really a joke, however.  Bowles and Simpson’s $4 trillion was derivative of many complex and controversial assumptions, and was calculated at a particular time.  Let’s review the numerical spreadsheet, and its even-more-subtle and important conceptual underpinnings.

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After the election campaign, the nation likely will turn in one way, shape or form to dealing with the budget.  Several analysts and bipartisan groups have had their say on what the ultimate plan should be.  Among those statements is a paper by Andrew G. Biggs, Kevin A. Hassett and Matthew Jensen of the American Enterprise Institute, entitled “A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked.”  This paper, released in December 2010, has received an enviable amount of attention for a fairly technical enterprise.

To tell you what I am going to tell you:  The authors argue that the United States should reduce its deficit much more (they pick 85 percent) by reducing spending, and thus much less by raising revenues, than the most widely recognized bipartisan plans (which are at about 50-50).  I think they overplay their statistical hand.  This post gets a bit nerdy, but in my view the reasoning comes down to a fairly fundamental issue.  So all but the faint of heart, please read on.

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So as you have read as a prediction earlier on this site, and then seen and heard as news in the media, the economic-policy debate in this country has fully migrated from the halls of Congress to the campaign stump.  Nothing will be decided about the rapidly mounting debt despite the fast approaching collision with the “fiscal cliff” – a collision that was explicitly scheduled to be an action-forcing event.  We are left to consider what will happen after the election to head off the train wreck.

The expected “lame duck” session of the Congress will not be the Promised Land.  It will not bring a religious conversion on the part of Senators and Representatives newly freed from the unholy demands of their constituents.  However, in the most hopeful scenario, it will have to produce a change of course to avoid the scheduled collision with the fiscal cliff.  Here is a brief description of what will be required.

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The standard argument for repairing the nation’s hemorrhaging budget is that it would be good for the economy.  Many economists are in the lead of the campaign to do so.

However, many would-be economists are among the cheerleaders, and some of the chants that you hear make no sense.

Still, fixing the budget is an economic imperative.  We just need to understand the relevant laws of physics to do it right, and not wind up causing more harm than we avoid.

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In an op-ed in the Financial Times, CED spokesperson and Honeywell chief executive David Cote, calls on business leaders to speak out and urge action regarding our nation’s debt problem:

There is no time to waste. As we approach the end of the year, we get closer to the edge of the “fiscal cliff”. If there is no political deal, the US will face a triple witching hour of automatically triggered spending cuts, the expiry of tax cuts, and a failure to raise the debt ceiling. We all saw what happened during the last debt ceiling “discussion”. It wouldn’t be a surprise to see the same dysfunctional process or another agreement to “kick the can down the road”, as they say in Washington.

CEOs can no longer stand on the sidelines. We need to ensure debt resolution is a core part of the presidential election campaign.

Mr. Cote offers five specific recommendations for U.S. CEOs.  He was a member of the US fiscal commission chaired by Erskine Bowles and Alan Simpson.

Ed Crooks from the Financial Times features Mr. Cote’s remarks in his piece.