4 Critical Reasons Why You Should Care About the Budget Deficit

Last Updated Nov 19, 2010 10:49 AM EST



The latest deficit reduction plan, this one proposed by the Bipartisan Policy Center (BPC), calls for instituting a 6.5 percent "national consumption" tax (essentially, a sales tax) and suspending the Social Security payroll tax in 2011 in order to spur economic growth. These are two distinctive elements that didn't make it into last week's Bowles-Simpson deficit reduction proposal.

If all this nitty gritty talk about ways to reduce the budget deficit makes your eyes glaze over, you're not alone. In a CBS News poll released last week, just 4 percent of Americans surveyed said the budget deficit should be the main focus of the new Congress come January. By comparison, 56 percent said jobs and the economy should be at the top of Congress' 2011 To Do list.

With unemployment stuck near 10 percent and a molasses-slow recovery holding back job and salary growth, it certainly makes sense that Americans are channeling Jim Carville's famous "It's the Economy, Stupid" mantra.


But what's getting lost in the mix here is that you can't really fix the economy or the job picture if you don't also fix the country's long-term debt problem. And make no mistake, our federal debt, and the costs of servicing it, are a major piece of the deficit problem. In fact, the 6.5 percent national sales tax proposed by the BPC was specifically labeled a "debt-reduction sales tax."

Below are four reasons you really, truly want the Obama Administration and Congress to get their acts together and come up with a long-term plan to tackle our crushing debt. How we do it is what should be debated. But to not have that debate today and to just kick the proverbial can down the road would make today's economic woes seem minor in comparison. Here's why we all need Washington to tackle our massive debt load:


1. "We are running the risk of debt growing larger than the economy." Those are the exact words uttered by former Senator and BPC member Tom Daschle when he kicked off the release of the BPC deficit reduction plan. That's not some dramatic political posturing; it's just the cold and sobering facts.

The standard way to measure the impact of our federal debt is to look at it relative to the country's Gross Domestic Product (GDP). Before the financial crisis, our federal debt as a percentage of GDP was motoring along at 40 percent, not too much worse than the long-term average of 36 percent. This year, however, the Congressional Budget Office (CBO) projects our debt will reach 62 percent of GDP. If we just sit on our hands and do nothing, the CBO predicts that our debt will hit 90 percent of GDP by 2020, and eventually surpass total economic output in 2025. By 2037, the debt would exceed 200 percent of GDP.

The BPC deficit reduction plan lays out the lovely fact that in 2020, the federal government will owe $1 trillion in interest payments on our federal debt; that represents 17 percent of all our spending. "Viewed another way, the federal government will have to allocate about half of all income tax receipts to pay interest, and interest payments will exceed the size of the defense budget," is how the BPC puts it. Check out the BPC graphic below; the blue "Net Interest" payments are what we will be shelling out to pay our debts. Other than Medicare and Medicaid (that's a topic for another day), our national debt will be the fastest-growing problem.


2. Once federal debt exceeds 90 percent of GDP, history tells us growth slows dramatically. Ken Rogoff and Carmen Reinhart are former IMF honchos and well-respected economic academics who wrote 2009's influential This Time is Different that chronicles hundreds of years of global financial crises. The duo recently released a study that found that once a developed country's debt exceeds 90 percent of GDP, its economic growth takes a serious hit. (Just a reminder: we're currently scheduled to hit that figure by 2020). In their study, Growth in a Time of Debt, they write that:
"Over the past two centuries, debt in excess of 90 percent [of GDP] has typically been associated with [average] growth of 1.7 percent, versus 3.7 percent when debt is low (under 30 percent of GDP)."
If you want to see our economy grow at a stronger pace, you should be rooting for Washington to figure out a way to reduce our debt. The BPC plan aims to keep the long-term ratio at its current 60 percent level.


3. High debt loads make it more expensive to borrow and weaken our global position. The CBO recently weighed in on the long-term impact of carrying around a whole lot of debt, saying that "if debt continued to rise rapidly relative to GDP, investors at some point would begin to doubt the government's willingness to pay interest on that debt."

Now no one is suggesting the U.S. would default on its debt; that's not what's at play here. The more pressing problem is that those investors -- China, Japan, and the other foreign countries that currently own about half of our federal debt -- would insist on getting paid more interest to keep financing our debt. That's exactly what is happening in Europe right now; Ireland's bond yields have jumped amid its ongoing debt crisis and just yesterday Portugal saw the yield on a new 1-year government bond pop up to 4.8 percent, compared to 3.3 percent on an offering from two weeks ago.

If we end up needing to lift our interest rates well beyond their historic norms, that's nothing but bad news for our economy and for jobs. At Wednesday's BPC press conference, former Senator Pete Dominici, co-head of the group's Debt Reduction task force, repeatedly referred to the debt as our nation's "quiet killer" and referenced an earlier statement from Joint Chiefs of Staff Chairman Mike Mullen that our nation's debt is "the single biggest threat to our national security."

4. Kicking the deficit can down the road makes it even worse. There is no question Washington has an overabundance of issues to juggle right now, and in the prioritizing process it's always natural to put your short-term worries up top and push the longer-term problems far down the to do list. But running away from our debt and deficit problem is just going to make the eventual solution even more costly to all of us.

The General Accountability Office (GAO) has a handy calculation that measures how much we would need to increase taxes and reduce spending to bring our revenue in line with spending (not just money spent on servicing our debt, but all our spending). In its latest "fiscal gap" calculation, the GAO estimates that if we attacked the problem today, it would take either a 52 percent increase in revenue (i.e., taxes), or a 35 percent decrease in non interest-related spending. But if we wait until 2020 to tackle the problem, we'd need either a 62 percent increase in revenues, or a 40 percent cut in spending. That's quite an expensive trade-off for doing nothing today. And as the GAO points out, putting off action also raises the pain factor:
"The longer action to deal with the nation's long-term fiscal outlook is delayed, the greater the risk that the eventual changes will be disruptive and destabilizing."
There are no easy choices here. But to make no choice is just irresponsible. If you care about the economy and jobs in 2011, you need to be just as concerned with what Washington does -- sooner rather than later -- to deal with our federal debt and deficit. The issues are attached at the hip.

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  • Carla Fried

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