Obama Urges Commission to Take 'Hard Look' at Massive Deficit
Policy + Politics

Obama Urges Commission to Take 'Hard Look' at Massive Deficit

President Says Spending and Taxes ‘On the Table’

Warning of serious economic consequences unless the government reins in the budget deficit, President Obama today urged members of his new bipartisan fiscal reform commission to offer the White House and Congress specific proposals by late this year for substantially reducing red ink.

Flanked by the co-chairmen of the new commission, Obama challenged the two parties to join in taking a “hard look” at the growing gap between what the government spends and raises in revenue, and to “think more about the next generation than the next election.”

Political leaders of both parties have voiced alarm about the mounting deficit, but there is substantial disagreement on how best to proceed – and whether the government should consider raising taxes or cutting costs with the economy still in trouble and unemployment hovering just below 10 percent.

Obama noted that the country’s budget deficit problems have been severely aggravated by the financial crisis, a historic recession and exploding health care costs, but he also blamed political leaders for “decades of bad habits in Washington” that led to a deferral of politically difficult but necessary budget actions.

While vowing to continue to do what it takes to spur the economy and create new jobs, Obama declared in the White House Rose Garden that “we have an obligation to future generations to address our long-term structural deficits which threaten to hobble our economy and leave our children and grandchildren with a mountain of debt.”

The Key Players Convene
Obama addressed the commission for the first time during a brief White House ceremony this morning, then sent its 18 members across Lafayette Park to a White House conference center, where they began exchanging views.

Commission co-chairmen Alan Simpson, a former Republican senator from Wyoming, and former White House chief of staff Erskine Bowles strode quickly into the meeting, saying that Federal Reserve Chairman Ben Bernanke, who had arrived earlier, was waiting. They said they were upbeat about the session, but did not elaborate.

Speaking to the commission, Bernanke made his most urgent call yet to get the nation's fiscal house in order. He warned that failing to curb federal budget deficits would damage the U.S. economy in the long run and would push interest rates higher – not only for Americans buying cars, homes and other things – but also for Uncle Sam to service its debt payments.

“The task of developing and implementing sustainable fiscal policies is daunting, but meeting this challenge is absolutely essential,” Bernanke said. “History makes clear that failure to achieve fiscal sustainability will, over time, sap the nation's economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.

On their way into the commission's meeting, several members said Obama gave the group at the White House a good pep talk. Senate Budget Committee Chairman Kent Conrad, D-N.D., said the president told them about “how important it is that this be successful. This is one of the key challenges facing us. What’s key is that things not get ruled out.”

Sen. Tom Coburn, R-Okla., said the president “always lifts us up and makes us ready to go to work, whether we’re for him or against him.” He would not say which way he wanted to go, but appeared skeptical.

Senate Finance Committee Chairman Max Baucus, D-Mont., said the president told the group to “get the job done and make it balanced and fair.”

Bowles and Simpson, the co-chairmen of the new panel, have declared that the U.S. cannot “grow its way” out of spiraling deficits, and that both spending cuts and revenue increases will be essential to address the problem. Obama echoed those views in his remarks this morning, saying that “everything has to be on the table” as part of the commission’s deliberations. “We’re not playing that game,” Obama said. “I’m not going to say what’s in; I’m not going to say what’s out. I want this commission to be free to do its work.”

Government forecasts indicate that without substantial changes in federal spending or taxation policies within the coming decade, a massive, spiraling debt could undermine the government’s ability to finance such basic services as education, care for the elderly and national defense. The budget deficit totaled $1.4 trillion last year and it may be that high or higher this year.

The Core Issue
The fundamental problem, according to the Congressional Budget Office and the Office of Management and Budget, is that the federal tax burden has been consistently at 18 to 19 percent of the gross domestic product for the last half century, while spending – even when the economy is at full employment – is projected to be four or five percentage points higher than that in the future. The fundamental problem, according to the Congressional Budget Office and the Office of Management and Budget, is that the federal tax burden has been consistently at 18 to 19 percent of the gross domestic product for the last half century,  – even when the economy is at full employment – is projected to be four or five percentage points higher than that in the future.

The mounting deficit problem has been exacerbated by a recession that has cut into tax collections at the same time the government has spent heavily to bail out the financial community and to kick-start the economy and job creation.

Estimates in President Obama's fiscal 2011 budget, which includes some significant changes in both taxes and spending not included in CBO's baseline, are even bleaker: a 2017 deficit of $778 billion and debt owned by the public of $15.7 trillion — 74 percent of GDP. Some of those proposed Obama policy changes include extending expiring tax cuts for families making less than $250,000 a year and maintaining the current income threshold for the Alternative Minimum Tax.

President Obama has given the commission the task of finding ways to balance revenues and spending for everything except interest on the debt by 2015. Even without having to offset net interest payments — $188 billion this year and an estimated $571 billion by 2015 — balancing the budget in five years is a tall order given the daunting CBO and OMB projections. The commission has been mandated to deliver its recommendations by Dec. 1, in time for a lame duck Congress to at least consider the proposals.

The Outlook
But the track record of presidential commissions is not encouraging, and few lawmakers or lobbyists expect the commission to agree on much, in light of a bitterly partisan atmosphere and a looming midterm election with control of the House at stake. The commission membership spans the ideological and political spectrum in Washington, from liberal lawmakers and a labor leader to moderate Democratic and Republican “deficit hawks” to hard line Republican conservatives.

Simpson and Bowles said during an interview on “Fox News Sunday” that any solution will require a combination of cuts in the growth of major entitlement programs and tax increases. “Hell, we could have double (-digit) growth for 30 years and never grow our way out of this,” Simpson said. Bowles said he would want to look at spending cuts first, but that commission members should examine the federal tax system, to find ways to close tax breaks and loopholes, and that a European-style value-added tax should also be considered. “Look, I think we have to go after everything.”

While many of them have said they are willing to put “everything on the bargaining table,” the commission is stacked with elected officials with strong political agendas. Liberal Democrats fear that the solutions the commission will offer will require deep cuts to Social Security and Medicare, two major engines of government spending, while conservatives believe the commission will try to set the stage for a boost in tax revenues to try to substantially shrink the deficit. Spending on Social Security, Medicare and Medicaid is far outpacing tax revenue as medical care costs for seniors and the poor continue to mount and more and more baby boomers retire.

The Fiscal Times, an independent business venture, is funded by Peter Peterson, but is not affiliated with his foundation.