We Must Tackle the Debt Threat Now
By: Douglas Holtz-Eakin and James Jones
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.