Obamaâs dangerous debt

WASHINGTON — Just how much government debt does a president have to endorse before he’s labeled “irresponsible”? Well, apparently much more than the massive amounts envisioned by President Barack Obama. The final version of his 2010 budget, released last week, is a case study in political expediency and economic gambling.
Let’s see. From 2010 to 2019, Obama projects annual deficits totaling $7.1 trillion; that’s atop the $1.8 trillion deficit for 2009. By 2019, the ratio of publicly held federal debt to gross domestic product would reach 70 percent, up from 41 percent in 2008. That would be the highest since 1950 (80 percent). The Congressional Budget Office, using less optimistic economic forecasts, raises these estimates. The 2010-19 deficits would total $9.3 trillion; the debt-to-GDP ratio in 2019 would be 82 percent.
But wait: Even these totals may be understated. By various estimates, Obama’s health plan might cost $1.2 trillion over a decade; Obama has budgeted only $635 billion. Next, the huge deficits occur despite a pronounced squeeze of defense spending. Unless foreign threats recede, military spending and deficits might both grow.
Except from crabby Republicans, these astonishing numbers have received little attention. Everyone’s fixated on the present economic crisis, which explains and justifies big deficits for a few years. Hardly anyone notes that huge deficits continue indefinitely.
One reason Obama is so popular is that he has promised almost everyone lower taxes and higher spending. Beyond the undeserving who make more than $250,000, 95 percent of “working families” receive a tax cut. Obama would double federal spending for basic research in “key agencies.” He wants to build high-speed rail networks that would require continuous subsidy. Obama can do all this and more by borrowing.
Consider the extra debt as a proxy for political evasion. The president doesn’t want to confront Americans with choices between lower spending and higher taxes — or, given the existing deficits, perhaps less spending and more taxes. Except for talk, Obama hasn’t done anything to reduce the expense of retiring baby boomers. He claims to be containing overall health costs, but he’s actually proposing more government spending.
Closing future deficits with either tax increases or spending cuts would require gigantic changes. Discounting the recession’s effect on the deficit, Marc Goldwein of the Committee for a Responsible Federal Budget puts the underlying “structural deficit” — the basic gap between the government’s spending commitments and its tax base — at 3 percent to 4 percent of GDP. In today’s dollars, that’s roughly $400 billion to $600 billion.
It’s true that since 1961 the federal budget has run deficits in all but five years. But the resulting government debt has consistently remained below 50 percent of GDP; that’s the equivalent of a household with $100,000 of income having a $50,000 debt. Adverse economic effects, if any, were modest. But Obama’s massive, future deficits would break this pattern.
At best, the rising cost of the debt would intensify pressures to increase taxes, cut spending — or create bigger, unsustainable deficits. By CBO’s estimates, interest on the debt as a share of federal spending will double between 2008 and 2019, from 8 percent of the total to 16 percent. 
At worst, the burgeoning debt could trigger a future financial crisis. The danger is that “we won’t be able to sell it (Treasury debt) at reasonable interest rates,” says economist Rudy Penner, head of the CBO from 1983 to 1987. In today’s anxious climate, this hasn’t happened. American and foreign investors have favored “safe” U.S. Treasuries. But a glut of bonds, fears of inflation — or something else — might one day shatter confidence.
Present gain comes with the risk of future pain. As the present economic crisis shows, imprudent policies ultimately backfire, even if the reversal’s timing and nature are unpredictable.
The wonder is that these issues have been so ignored. Imagine that a President McCain had submitted a budget plan identical to Obama’s. There would almost certainly have been a loud outcry: “McCain’s Mortgaging Our Future.” Obama should be held to no less exacting a standard.
© Washington Post Writers Group

Obamaâs dangerous debt 05/19/09 [Last modified: Tuesday, May 19, 2009 5:32pm]

    

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