Alarming Gross Debt Sparks Fiscal Commission Debate
Policy + Politics

Alarming Gross Debt Sparks Fiscal Commission Debate

Members of President Obama’s bipartisan deficit commission argued on Wednesday that the government’s mountain of debt is higher than it appears and already threatens to hamper economic growth. But on a day when Republicans and Democrats bent over  backwards to be polite to one another, Democrats themselves appeared divided between fiscal conservatives and liberals.

At the panel’s second public hearing on Capitol Hill, the more hawkish Democrats pushed for aggressive long-term belt-tightening and argued that the most widely used measure of government debt understates the nation’s fiscal problems. But liberal Democrats pushed back, arguing that it would be a mistake to slash the deficit too quickly.

“It’s very important that we don’t in our zeal focus on deficit reduction right now,’’ said Rep. Jan. D. Schakowsky of Illinois.  “We will need to make sure we can evaluate each of the proposals as they affect real people.”

The panel’s first substantive fight is likely to be about how to best measure the federal debt. Though the issue seems academic, it is a sore point in battles between conservatives who decry “unsustainable’’ deficits and liberals who complain that “deficit hysteria’’ is being used as cover to cut Social Security.

Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee, argued that the focus should be on “gross’’ federal debt, which includes debt held by the public as well as debt the government owes to itself – most of which is owed to the Social Security trust fund. By that measure, federal debt already totals $13 trillion, or almost 90 percent of the nation’s gross domestic product.   

Carmen Reinhart, a University of Maryland economics professor and co-author of a much-discussed new study of financial crises over the past 800 years, told the panel that she focuses on “gross’’ debt – and the United States is nearing a flashpoint.

On average, Reinhart said, nations with gross debt higher than 90 percent of their GDP have seen annual economic growth rates slow by an average of 1 percentage point. For the U.S., which has an average annual growth rate of about 3 percent, that could mean a one-third reduction in growth.

But most budget analysts have focused only on “publicly held” debt, which excludes trillions of dollars that the government has borrowed from the Social Security and Medicare trust funds. 

By that measure, the government’s debt is a more modest $8.4 trillion and is slightly under 60 percent of G.D.P. In a blog post last year, White House Budget Director Peter Orszag argued that the smaller number was probably more accurate.  

On Wednesday, Conrad firmly embraced the more alarming measure of gross debt, and said the panel should agree on an aggressive timetable for reducing it by 2020. “We should be looking over time to get at least a gross debt that is below 90 percent, and I would think over time we would want to get below that, maybe in the range of 80 percent,’’ Conrad said. 

Alice Rivlin, a former White House budget director under President Bill Clinton and an influential Democrat, echoed Conrad. “The gross debt has got to come down over time or we won’t have done our job,’’ Rivlin warned.

In an interview after the meeting adjourned, Rivlin said budget analysts are focusing more on total federal debt because the government’s obligations to the Social Security trust fund are starting to come due. “The focus is coming around to gross debt, because we’re already getting to the point where we have to redeem those bonds,’’ she said. 

But liberal Democrats on the panel were quick to take exception, warning that almost 10 percent of workers are still unemployed and that a premature shift to fiscal austerity could worsen the misery that millions are already facing.

“I would hope we don’t concentrate only on numbers,’’ said Rep. Xavier Becerra, a California Democrat. “If we take a look at what ordinary Americans face, instead of just the sheer numbers, I think that will give us an accurate picture.”

In an interview after the meeting, Schakowsky warned that the growing “sense of crisis” about federal deficits could backfire if it provokes rapid spending cuts that choke off the recovery and send debt even higher. “I’m worried about a double-dip recession,’’ she said.

That wasn’t the only intramural argument among Democrats. Sen. Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, joined Conrad in calling for tax reform that would increase the “competitiveness” of American companies.  The implication was that at least some corporate taxes are too high.

That provoked a rejoinder from Sen. Dick Durbin of Illinois, the Senate majority whip, about the need to whittle down special tax breaks.

“We need to find incentives for growth,’’ Durbin acknowledged politely. “But I also think there has to be some candor about tax expenditures. They’re not free. They add to the debt.”

Republicans on the panel generally stayed out of those arguments, though some made low-key pitches against raising taxes and for cuts in entitlement spending. David M. Cote, chief executive of Honeywell International and one of Obama’s Republican appointees to the panel, gently nudged politicians on the panel to focus on galvanizing public awareness. Cote said he was stunned when commission co-chairman Erskine Bowles warned that the government would be paying $1 trillion a year in interest on the national debt by 2020 unless Congress and the Obama administration took action.

“If I were a citizen and I heard that ten years out we would be spending $1 trillion a year on interest, that would get my attention. A trillion dollars! I run a big company, but that’s a lot of money.”

By almost any reckoning, any effort to reduce federal deficits to sustainable levels will require brutal decisions from Congress.      Even by the more limited approach of counting only “publicly held’’ debt, the Congressional Budget Office projects that debt will equal 90 percent of gross domestic product by 2020.  

To keep that debt from climbing higher than 69 percent, which would still be far higher than it was before the financial crisis of 2007 and 2008, the government would have to completely balance its budget by 2020. 

Tell us what you think about this article, using the comment box below.

Related links:
Social Security, defense top list of debt panel's targets – USA Today
Don't Break the Promise – The Huffington Post
Deficit Debate: The Gas Or The Brakes? – National Journal