“We have started an adult conversation that will dominate the debate until the elected leadership here in Washington does something real.”
So claimed Erskine Bowles, co-chairman (along with former Sen. Alan Simpson) of President Barack Obama’s commission on federal deficits and debt, last week.
The feeling that Americans and their representatives in Congress were ready for serious “adult” work on reducing deficits and debt lasted about three days, from last Friday’s final fiscal commission meeting to Monday’s announcement by Obama of a $900 billion accord with congressional Republicans to extend tax cuts and embark on a round of new spending.
"I'm deeply disappointed that we have this short-term deal and it's not linked to long-term fiscal restraint," Bowles said Wednesday.
On Thursday morning after he and Simpson met at the White House with Budget Director Jack Lew and Treasury Secretary Tim Geithner, they issued a statement calling on Obama to launch negotiations with congressional leaders from both parties "on the critical next step of establishing a serious fiscal responsibility plan" and to unveil his own deficit cutting proposals in his State of the Union address, building on the ones in last week's Bowles-Simpson report.
Long-term debt problem
The long-term budget prospects remain as stark as they were before Obama announced his deal with the GOP leaders.
According to the Congressional Budget Office, the ten-year budget forecast is for continued budget shortfalls, extraordinarily high national debt (compared to previous decades), and higher interest payments to service that debt — to the point that CBO predicts that by 2016 interest payments will be larger than military spending.
When debt service exceeds military spending, says Harvard historian Niall Ferguson, it has historically been the tipping point where a great empire or nation ceases being great.
Why did the feeling that America was ready for serious debt reduction evaporate so quickly?
“I think it’s true that a number of people just don’t buy it, because we still are different than Greece and Ireland,” said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget.
“They can’t believe that the debt problems could actually come here," she said. "I think a number of other people think, ‘maybe I do buy it but it isn’t worth the sacrifice of actually changing things.’ But I think most people don’t quite buy it — and the worrying thing is that people who buy it the most are the financial people, the people who are managing money.”
Stopping momentum for debt reduction
MacGuineas said the tax and spending deal that Obama announced Monday night did seem “surreal” coming as it did on the heels of the Bowles-Simpson plan. “It stops the momentum that we should have started last week with the Bowles-Simpson plan.”
But she remains optimistic. She compared the accord with a smoker who is on the verge of quitting smoking. “You smoke an extra cigarette just before you have to give it up. I really do think this is the last major deficit-financed bonanza that we’re going to see.”
She pointed to fact that a conservative member of the Bowles-Simpson panel, Sen. Tom Coburn of Oklahoma and a liberal Democrat, Sen. Dick Durbin of Illinois, both voted for the plan. (It got 11 votes, three shy of what was needed to officially forward its recommendations to Congress.)
Coburn took a jab at his own party Wednesday when he denounced as "political cynicism" a statement by Dan Bartlett, a former staffer for President George W. Bush, who said the 2001 tax cut was designed as a "trap" so that it "becomes almost impossible to remove it."
Coburn has hinted he might vote against the deal Obama negotiated with GOP leaders and urged his colleagues to debate a plan to cut the deficit.
"We are going to have a major liquidity crisis, and we are also going to have a major interest rate crisis," he said Wednesday. "Nobody knows when it comes."
Economic historians and members of the president’s fiscal commission do believe a sovereign debt crisis is feasible, or at least that the United States will suffer many years of anemic growth and high unemployment.
"High debt-to-GDP levels, gross debt above 90 percent (of gross domestic product) are associated with notably lower growth outcomes," University of Maryland economist Carmen Reinhart told the Senate Budget Committee earlier this year.
Federal government debt is approaching that level. Using a different measure — total debt for all levels of government — U.S. gross debt is at 93 percent of GDP, according to the International Monetary Fund. (Compare that with Greece at 130 percent of GDP and Ireland at 99 percent of GDP.)
Wolf at our door?
Making the analogy between hostile bond markets and a wolf, Reinhart also warned that “We never know when the wolf will be down (at) our door. The wolf is very fickle and markets can turn very quickly. And a high debt level makes us very vulnerable to shifts in sentiments that we cannot predict.”
In a debt crisis, in order to persuade bond buyers to keep buying Treasury bonds, Congress would be forced to cut spending and raise taxes.
The commission member who put that scenario most clearly was a non-politician, Honeywell chief executive David Cote: “These difficult political decisions will get made one of two ways. The first is we can do it thoughtfully and proactively. The second is we can wait for the bond market to force it upon us, and that will be decidedly harder, more abrupt and unpleasant. We can ask Greece and Ireland what that's like, and soon Italy, Spain and Portugal.”
He added that Americans ought to wonder, "What happens when the bank — in this case foreign countries like China — doesn't want to loan you any more money?"
Of course, the alternative to raising revenues through borrowing is raising them through higher taxes. But one reason Obama is not likely to get Republicans to agree to that is their memories of Republican presidents Ronald Reagan and George H.W. Bush agreeing to tax increases in 1982 and 1990.
“If I believed that the increased revenue would actually be used for deficit reduction, you know, I might reluctantly come to the table, in a global agreement," said panel member Rep. Jeb Hensarling, R-Texas last week, before voting against the debt commission's recommendations.
Hensarling said when he recalls Reagan's agreement to raise taxes in 1982 and Bush’s reversal on taxes in 1990, “It just seems to me that somehow the spending restraint never quite materializes, and yet the increased revenues do, and it seems like the increased revenues simply chase the spending.”
It's Obama in the Oval Office now, not Bush or Reagan, but it is the familiar tug of war between Republicans and Democrats over cutting taxes versus cutting spending.
Obama’s statement at Tuesday's press conference implied that in some areas federal spending may not be big enough.
“What are we doing to revamp our schools to make sure our kids can compete?” he asked. “What are we doing in terms of research and development to make sure that innovation is still taking place here in the United States of America? What are we doing about our infrastructure so that we have the best airports and the best roads and the best bridges?”
He sounded confident he will win the debate with Republicans — forcing them to agree to tax increases because they'll find out once they start running the House of Representatives that spending cuts would be, as he said Tuesday, “very painful.”
Putting on his hat as campaign strategist, Obama said, “Either they rethink their position, or I don’t think they’re going to do very well in 2012.”
He said, “The fact of the matter is the American people already agree with me.”