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We must stop procrastinating on federal debt

Stop procrastinating. That is always good advice, and always hard to heed. But in some situations procrastination is more damaging than others. One of those involves getting the country's fiscal health in order. The latest advice to stop procrastinating -- or, perhaps more important, the latest explanation of why procrastinating will only make matters worse and the fix that much more painful -- comes courtesy of the Congressional Budget Office, and its new report on the long-term budget outlook.

The CBO, like other sensible economic analysts, is not calling for an immediate retrenchment to deal with record deficits -- far from it. As the report explains, "With economic activity and employment currently well below the levels that could be achieved by fully utilizing the nation's labor force and capital stock, raising revenues or curbing spending immediately would probably slow the economic recovery."

Translation: it's too soon to hit the brakes.

"However," the report adds, "the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are implemented after the period of economic weakness, the smaller will be the damage to the economy from rising federal debt."

Translation: The longer we dawdle, the harder this is going to be.

That might be obvious -- although, then again, perhaps not to those who make the case that faster-than-expected economic growth could make the problem evaporate, or that slowing the rise of health care spending could make it much less daunting. Perhaps, but that is a dangerous hope on which to rely. I might win the lottery tomorrow, but it's not a very smart retirement plan.

The CBO report shows why.

It looks at the "fiscal gap" -- the extent to which government would need to immediately and permanently cut spending, raise taxes or both -- in order to stabilize the national debt at its level as a share of the economy at the start of this year. Not that this is anything to be happy about: 53 percent of gross domestic product, a level not seen since shortly after World War II.

Imagine that policymakers want to keep the debt stable through 2035. Assume a realistic policy scenario -- most of the Bush tax cuts continue, the alternative minimum tax is adjusted to keep pace with inflation, scheduled cuts in Medicare reimbursements to doctors are canceled.

If the new austerity begins in 2011, it would require an annual increase in revenue or cut in spending equivalent to 4.8 percent of GDP. This would amount to about $715 billion (in 2010 dollars) the first year -- more than the entire defense budget. But waiting until 2015 boosts that number to 5.7 percent of GDP, meaning finding $1 trillion of savings that first year. Waiting until 2020 boosts the necessary trims to 7.9 percent of GDP, or a daunting $1.5 trillion the first year alone.

And this calculation does not reflect the true cost of waiting, as the overhang of debt crowds out investment and drives up interest rates. "Incorporating such effects would make the impact of delaying policy changes even more severe," the report warns.

Once this ugly recession is past, the country is in for an ugly period of belt-tightening. How ugly will depend on how quickly policymakers manage to act.

By Ruth Marcus  | July 2, 2010; 3:33 PM ET
Categories:  Marcus  | Tags:  Ruth Marcus  
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Comments

Ruth,
In case you hadn't noticed, 10 year T-bills are now yielding only 2.96%, hardly pressaging an inflationery tsunami.

Why don't you stick to politics, and leave fiscal policy to this administration. They are aware of the policy blunders of Herbert Hoover's administration.

Posted by: capmbillie | July 2, 2010 4:52 PM | Report abuse

If you want to deal with the deficit, there are four ways to address this problem. First, we can raise taxes. Second, we can cut spending. Third, we can grow our economy and limit the growth in government spending. Finally, we can adopt a combination of these three approaches. Most economists though not all believe that in our current economic straight, it does not make sense to either raise taxes or cut government spending. Therefore, the most practical way forward is to grow our economy. The government can do all sorts of things in this regard. We can recognize that the idea that a service economy is the way forward was a mistake and return to an economy that builds things. We can recognize that we need to realize that free trade has not served this nation well and revert to being a mercantilist state. We can recognize that cap and trade is a mistake and instead enact a program that rewards energy efficiency. I can go on and on, but I believe that I have given a hint of what needs to be done.

Posted by: jeffreed | July 2, 2010 5:22 PM | Report abuse

..."POUR IT ON PRESIDENT BARACK OBAMA POUR IT ON...Spending only way to pull America out of the giant hole Republicans put us all in by losing a record 8.5 Million jobs, and a record/debt/Bill/Deficit of $1.5 TRILLION, then ran away with the "Lowest job approval rating in the history of the United States Presidency Blew it Bush/Admin Republicans/party of "NO" 20 percent, the Pew Poll said!

This registered Voter/vet USAF, also says, be sure now you run and put some more back in they really do appreciate it ...lol....

Posted by: ztcb41 | July 2, 2010 6:29 PM | Report abuse

You're all boring. Zzzzzzz.

Posted by: slatt321 | July 2, 2010 7:58 PM | Report abuse

We're going to spend our way to prosperity, then we're going to tax our way to prosperity. Repeat ad nauseum.

Posted by: kitchendragon50 | July 2, 2010 8:24 PM | Report abuse

Ruth, dear, please forgive U.S. but - setting aside the fact that W and a Senate & House controlled by his Rs passed a Medicare/Medicaid DRUG "bill" (that's a pun) that they did NOT pay for - would you mind, too much, if we offer you a "flat tax" proposal = all of U.S. should pay into Social Security that same percentage of all of our income, both earned and investment. And, that we all be required to pay our fair share, equally, for (y)our and W's drugs "bill".

You do see, do you not, that IF we all do that there is NO funding crisis with Social Security, Medicare and/or Medicaid?

What could be more fair, to all of U.S., than a "flat tax"? {now, if solving our abs problems were as easy...}

Posted by: JGBellHimself | July 2, 2010 10:23 PM | Report abuse

Ruth, dear, please forgive U.S. but - setting aside the fact that W and a Senate & House controlled by his Rs passed a Medicare/Medicaid DRUG "bill" (that's a pun) that they did NOT pay for - would you mind, too much, if we offer you a "flat tax" proposal = all of U.S. should pay into Social Security that same percentage of all of our income, both earned and investment. And, that we all be required to pay our fair share, equally, for (y)our and W's drugs "bill".

You do see, do you not, that IF we all do that there is NO funding crisis with Social Security, Medicare and/or Medicaid?

What could be more fair, to all of U.S., than a "flat tax"? {now, if solving our abs problems were as easy...}

Posted by: JGBellHimself | July 2, 2010 10:25 PM | Report abuse

Impossible to save a drowning person, by taking the life line away before the person is safe.

Once safe, put the lifeline away.

Posted by: COWENS99 | July 3, 2010 3:56 AM | Report abuse

Impossible to save a drowning person, by taking the life line away before the person is safe.

Once safe, put the lifeline away.

Posted by: COWENS99 | July 3, 2010 3:56 AM | Report abuse

We need to again to invest in ourselves - not Iraq, not Afghanistan.

We need to ensure that our children are educated, and we need to invest in infrastructure. If we pull back on either of those, then our debt will overtake us.

Our infrastructure is poor. Our investment in higher education is poor.

Too many of our kids are settling with second rate education because the supply has been stripped by demand. We don't have enough first rate universities. Some states responded to the demand (e.g. George Mason in Virginia). Most states have not. Every kid needs more than a high school education. period.

Our national infrastructure is lagging. Anyone that travels internationally knows this. Our airports are a disgrace. Returning to America is like being proud of your parents and being disappointed in your own generation.

We have no high-speed rail. On both coasts high speed rail lines would save money and facilitate commerce. We shouldn't need to take a plane to get from New York to Boston or Washington to Atlanta. Its ridiculous. The ubiquity of our infrastructure gives us a great advantage. But we need to maintain and invest. We need modern airports (Sorry JFK, but you suck!)

Our energy infrastructure is antiquated. Literally, these are my grandparents transmission lines and power-plants. We need to recondition our national electrical infrastructure and bring more power plants online - from places we haven't had major power plants before ... like deserts.. like offshore wind farms... like new nuclear plants. Energy is the issue of our generation, and we need to give long-term sustainable solutions to our children.

We do these things, and we will see return on our investment. We will give our children a way to be Americans with a sustainable future.

Posted by: Super_Grover | July 3, 2010 4:35 AM | Report abuse

"Assume a realistic policy scenario -- most of the Bush tax cuts continue, the alternative minimum tax is adjusted to keep pace with inflation, scheduled cuts in Medicare reimbursements to doctors are canceled."
Translation: "Assume my preferences are the only sensible outcomes" If you were really serious and tough about the deficit, instead of posing, how about assuming tax reform that raises revenue?
"perhaps not to those who make the case that faster-than-expected economic growth could make the problem evaporate"
Figured out how to put links in your articles yet? You wouldn't be trying to show toughness by punching a straw man, would you?
"or that slowing the rise of health care spending could make it much less daunting. Perhaps, but that is a dangerous hope on which to rely."
You realize that advocating fiscal austerity without doing anything about health care costs means radically reducing the military? Or eliminating social security without privatization? This counts as hard nosed realism in your sphere?
It is not enough to obliquely contradict Krugman to make a contribution to the debate, you do have to have something logical to say.

Posted by: fgww | July 3, 2010 5:44 AM | Report abuse

How could this possibly be true.

We hear a constant message that huge deficit spending in the short term doesn't really matter?

This finding by the CBO show just how much short term borrowing affects the cuts necessary in the out years.

Posted by: cautious | July 3, 2010 7:29 AM | Report abuse

Two points:

1. All other industrialized countries have some form of universal government run health care. They get better care as measured by all the bottom line public health statistics, and they do it at HALF the cost per person. If our system were as efficient, we would save about $1.3 TRILLION each year. Problem solved.

2. In 1946 the debt was 120% of the GDP, It went straight down to about 32% in 1973. During this period 1946 - 1973 taxes were much higher. Marginal rates averaged 70%; they were 93% under Eisenhower. The economy was better than what we now have. For example, median wages went up 3 times as fast as since 1973. CEO's earned 50 times what their workers earned; it is 500 times today. Staring in 1973, the percent of wealth and income taken by the richest 10%, 1%, and 0.1% has gone up at an ever increasing rate. We need, we must have much higher taxes on the Rich.

Posted by: lensch | July 3, 2010 7:40 AM | Report abuse

The decision to not extend unemployment benefits and deepen both the human and economic pain was a great first step.

Posted by: smoke111 | July 3, 2010 8:12 AM | Report abuse

Of course our Government is procastinating our financial debt. That's what they seem to do the best. All talk and no go!

Posted by: randykree | July 3, 2010 12:24 PM | Report abuse

JGBellHimself posted July 2, 2010 10:23 PM
….”What could be more fair, to all of U.S., than a "flat tax"? {now, if solving our abs problems were as easy...}”

A better solution is “The Automated Payment Transaction (APT) tax”

The system, developed by University of Wisconsin Professor of Economics Edgar L. Feige, is known as the APT or Automated Payments/Transaction Tax.

Professor Feige details how the replacement of our current tax system with an (0.3%) APT tax could save the government and its citizens as much as $500 billion annually by eliminating the compliance, collection, enforcement and inefficiency costs of our current tax system. Yes, eliminate 95% of the IRS!!

A transaction tax would tax speculative stock transaction which a fair tax, flat tax or national sales tax would not do. The APT would eliminate state sales and income taxes.

The APT would apply to cash transfers by illegal aliens to their dependents in foreign countries and tap the underground economy.


http://www.apttax.com/

Posted by: abqbb | July 3, 2010 12:33 PM | Report abuse

When you are led by the inept Reid, it is hard to get things done like Pelosi in the House. Boomers hitting medicare the expansion of medicaid (due to more poor) will bankrupt in a decade. We need to double the tax to make it solvent and have no cap on social security to make that solvent. A return to long/short term capital gains and indexing for over a million gains could pay for an investment tax credit to create jobs. Put a fine of $50,000 for paying an illegal less than the cost of min. wage, have the illegals go down to the FBI for a background checked ten year work permit. The fine for being here illegally is their/employer social security payments and a quadruple medicare tax to offset their medical costs. Their children under 18 can become citizens but they are forbidden keeping that tax status for the time they are allowed to be here. Put a sound weapon fence along the border with a red painted crossbones in white area of death and a sosus line underground behind the weapon system. We would have enough border guards (strategic placement, helicopters) to interdict before most would reach the death area. That would seal the border effectively at the cost of the system.

Posted by: jameschirico | July 3, 2010 12:47 PM | Report abuse

When you are led by the inept Reid, it is hard to get things done like Pelosi in the House. Boomers hitting medicare the expansion of medicaid (due to more poor) will bankrupt in a decade. We need to double the tax to make it solvent and have no cap on social security to make that solvent. Out that and what you want though the budget process needing only a majority. A return to long/short term capital gains and indexing for over a million gains could pay for an investment tax credit to create jobs. Put a fine of $50,000 for paying an illegal less than the cost of min. wage, have the illegals go down to the FBI for a background checked ten year work permit. The fine for being here illegally is their/employer social security payments and a quadruple medicare tax to offset their medical costs. Their children under 18 can become citizens but they are forbidden keeping that tax status for the time they are allowed to be here. Put a sound weapon fence along the border with a red painted crossbones in white area of death and a sosus line underground behind the weapon system. We would have enough border guards (strategic placement, helicopters) to interdict before most would reach the death area. That would seal the border effectively at the cost of the system.

Posted by: jameschirico | July 3, 2010 12:48 PM | Report abuse

"Not that this is anything to be happy about: 53 percent of gross domestic product, a level not seen since shortly after World War II."

"Shortly!" Debt was not down to 53% till the 1960's. Exaggerate much?

lff

Posted by: lffile | July 3, 2010 12:50 PM | Report abuse

We have increased output without increasing jobs with the Stock Market fearing the lack of disposable income and the housing drop once the $8000 credit disappeared. There is plenty of money on balance sheets but a market too scared to make a move in this recessive economy. We should force people to buy American and business to invest in America. A 5% direct redistribution of income/sales tax should be put on a credit card with corresponding photo/bio ID. You can only buy American made products, pay medical costs, education costs (including private), adoption costs with this credit card. Go back to long/short term capital gains and index them over a million to pay for an investment tax credit of 10%. Allow people to forego mortgage payments for one year with no interest payments at the back end to stop the housing problem. Give Fannie/Freddie a charter to loan to small business allowing for growth. Put a carbon tax on everything to pay for an amortised tax credit of 50% for the purchase of new windows/doors/mechanical systems/solar water heater/insulation and solar/windpower. Use the rest for building nuclear power, geothermal by the lava bubble in Yellowstone, solar farms in the deserts and south, wind in the mountains and a superconduction electric grid for load transfers. We have the resource, do we have the will.

Posted by: jameschirico | July 3, 2010 1:03 PM | Report abuse

Step back a little and look at the larger problem. And the larger problem is this: for all practical purposes, debt is money. Money is debt.

Except for the coins actually minted by the US government, all the other "money" floating around is just someone else's debt. Much of this "money" is created by the banking system. Some is created by the Fed. But the underlying fact remains. They loan out "money," and want to be repaid that money, plus interest. But where does the interest come from? More borrowing. More debt.
In short, the "debt" problem is built into the system. It's guaranteed. Normally, we have a business cycle in which debts are extinguished. But Bernanke and Greenspan wanted to keep the Ponzi scheme going. They didn't want their banker buddies to lose money. So, now, America owes 13 trillion. It's time for the Greenspan/Bernanke depression.

Good luck waiting for that unemployment check. Just remember, Wall Street is once again hiring. No recession there.

Posted by: John991 | July 3, 2010 4:53 PM | Report abuse

Step back a little and look at the larger problem. And the larger problem is this: for all practical purposes, debt is money. Money is debt.

Except for the coins actually minted by the US government, all the other "money" floating around is just someone else's debt. Much of this "money" is created by the banking system. Some is created by the Fed. But the underlying fact remains. They loan out "money," and want to be repaid that money, plus interest. But where does the interest come from? More borrowing. More debt.
In short, the "debt" problem is built into the system. It's guaranteed. Normally, we have a business cycle in which debts are extinguished. But Bernanke and Greenspan wanted to keep the Ponzi scheme going. They didn't want their banker buddies to lose money. So, now, America owes 13 trillion. It's time for the Greenspan/Bernanke depression.

Good luck waiting for that unemployment check. Just remember, Wall Street is once again hiring. No recession there.

Posted by: John991 | July 3, 2010 4:54 PM | Report abuse

We must start thinking and acting smarter.

Let's flush out an "end point": a Federal budget when there is full employment. This budget should pay for all expenditures AND interest due on the debt and make a payment on the principal of the debt (based on the debt as a 60 year loan) PLUS provide a set aside for emergency needs. Included in expenditures would be revenue lost from deductions and tax credits.

Ineffective programs must be overhauled or eliminated. Research and rigorous scientific evaluations must be obtained for guiding assessment of programs and in determining future directions. For example, what works in education for disadvantaged students? About the only thing that seems to produce gold standard results (replicated findings of meaningful benefits) is longer school years and school time with students on task. THIS, because of the research support, and if implemented with rigor to the principles, should be what is supported. End funding for other efforts without proof of replicated and meaningful effects.

What about prevention/early intervention ? Betty Hart and Todd Risley reported in their concise, clearly written and readily understood book, Meaningful Differences, that unlike other interventions for disadvantaged children, whose effects were at best modest and did not endure, extensive, intensive early intervention (20 hours of in-home verbal interaction with disadvantaged children from 8 mos. to 3 years of age) resulted in overcoming disadvantage and producing enduring effects, e.g., average IQs of 100 and grade level achievement at 4th grade. This, implemented with fidelity to the principles, should be THE prevention/early intervention program. Cease funding the other, essentially ineffective efforts.

We need to rethink the Federal government's response to disasters. If the risk is known, e.g., earthquakes in California, Hurricanes for the Gulf States, and yes, off short oil drilling leaks, it should be the responsibility of the citizens and the government entities in these areas to provide for coping with the effects of such disasters, not all the citizens of the U.S. Want to live or continue to live in California? Expect to pay a tax and/or accept reductions in expenditures for government services in order to provide funds for coping with the effects of the known risk of earthquakes. Want to live or continue to live in a Gulf state? Expect to pay a tax or accept reductions in expenditures for government services in order to provide funds for coping with the effects of the known risk of Hurricanes and off short oil leaks.

The appropriation for the military should support only equipment and troops in this country. An overseas operations tax, the amount to be set each year based on "need", should be required to support equipment and troops operating outside the U.S. AND the cost of full, quality post-service care for troops deployed overseas.



Posted by: jimb | July 3, 2010 5:27 PM | Report abuse

So Ruth is jumping on the deficit crazy bandwagen. Only those who compare the federal government budget with a household budget would. The government has collective power to sustain debt and raise money to pay it off by stimulating economic growth.

This is not your checking account Ruth. Stick to what you know. Federal spending stimulates the economy and will eventually create jobs. This is no time to cry foul about debt.

Posted by: Single_Payer | July 3, 2010 9:38 PM | Report abuse

IMHO the so called government leaders need to run this country like they are a business out to make a profit for the American's who are the stockholders, instead they just sit around pretending to manage it and allocate budgets.
Just imagine if the actual leadership was under this kind of accountability to make this work instead using the old ways of running this country into the ground.

Posted by: travelsbyrope | July 4, 2010 7:42 AM | Report abuse

Federal spending stimulates the economy and creates jobs, huh?

Yeah, we heard that Keynesian fiction $787 billion and several million layoffs ago, when Obama was selling Congress on the fantasy that a stimulus package would keep unemployment under 8%.

Today, we're deeper in debt, with an even higher national debt than during the Bush administration -- and unemployment is worse than when Obama was inaugurated.

Our so-called leaders can either wise up and realize that the answer to too much spending isn't more spending (as the Europeans are finally beginning to do), or they can continue to behave like medieval doctors, bleeding the patient because he keeps getting weaker.

Posted by: UponFurtherReview | July 4, 2010 4:05 PM | Report abuse

It's a little late for Marcus to be whining.
Where has she been over the past 3 1/2 years as the Democratic Congress has steadily increased spending, entitlements, and the size of governments. State governments were forced to comply with new federal mandates, forcing them into the ditch.
Obama has increased the size of the federal government 25% in the 18 months that he's been in office.
The only "growth" industry in the US is government which grows at the expense of the private sector. Why do you think there are NO JOBS?????
Government is not the solution. It's the problem. It has to be reduced, not funded by increased revenue.
When you grasp this, call us back. We'll talk.

Posted by: parkbench | July 4, 2010 11:43 PM | Report abuse

Parkbench, you simple goober, there has not been a "Democratic" congress for the last 3 1/2 years or haven't you been awake enough to note how a obstructed a Democratic President and a majority in both houses has been obstructed by the republicans? Having a one person majority doesn't make a "Democratic congress" by any stretch of the imagination, unless of course that imagination is republican....Meanwhile I'll agree that Ruthie is whining a little late, she should have been howling for the last 8 years of the Bush mis-administration who hid 50% of the budget off books, not including the wars or the intelligence figures nor the figures of the stolen money of their cronies in the War Machine...

Posted by: Watcher1 | July 5, 2010 7:03 AM | Report abuse

Parkbench, you simple goober, there has not been a "Democratic" congress for the last 3 1/2 years or haven't you been awake enough to note how a obstructed a Democratic President and a majority in both houses has been obstructed by the republicans? Having a one person majority doesn't make a "Democratic congress" by any stretch of the imagination, unless of course that imagination is republican....
Posted by: Watcher1 | July 5, 2010 7:03 AM
==========================================
That is the irony isn't it?

The Democratic Party has held the majority in Congress since 2008 and could have passed any legislation they wanted. They only problem was other Democrats.

Just look at Health Care. The socialists finally decided to go it alone without any Republican support.

And yet the Democrats had to resort to official bribery and corruption within their own party to get it done.

Democratic states such as NE, LA, FL etc. all got their pound of flesh for their votes.

Throughout much of its history the worst enemy of the Democratic Party is other Democrats. But that will happen to any organization that operates more like a mafia family and less like a government.

Posted by: krankyman | July 5, 2010 7:39 PM | Report abuse

Hello Miss Marcus,

I wish to refer you to an article by Prof James Gailbraith on the New Deal 2.0 blog.

He addresses many of the contradictions perpetuated by the CBO regarding deficits and dept/GDP ratio.

Posted by: BahM | July 5, 2010 10:32 PM | Report abuse

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