How Will McCain or Obama Pay For This Mess?

New York Daily News | October 14, 2008

The agreement on the $700 billion bailout package begs the question, "How are we going to pay for all this?"

In the three presidential and vice presidential debates to date, the candidates have done their best to dodge the question. But it is not an issue that can be ignored for long. For anyone who needs to be reminded of the dangers of excessive borrowing, they need not look any further than the crisis we are currently in the midst of.

One of the many lessons from the spectacular financial market implosion is the importance of having a federal budget that is in good enough shape to respond to national crises as they come along. Whether it's a war, a natural disaster or a financial crisis, the government needs to maintain a balance sheet that is strong enough to meet national needs.

Unfortunately, years of deficit spending have led to a weakened position for our government. The wars in Iraq and Afghanistan? We are borrowing to pay for them. New spending for prescription drugs, homeland security, roads, farmers and more? Borrowed funds. New rounds of tax cuts each year? We put them on the tab. As a painful reminder of all this borrowing, the national debt clock just ran out of space as we passed the $10 trillion mark; now we have to pay to add a new zero.

And ironically, because of all this irresponsible borrowing, the very package crafted to save the economy could actually harm it.

Since the government doesn't have $700 billion lying around, a critical question will be whether or not our lenders are willing to front us the hundreds of billions of dollars needed to recapitalize our flailing financial sector. This line of credit will have to come on top of the more than $400 billion we are already borrowing this year alone. And since Americans don't have sufficient savings, we will have to turn to our overseas lenders to help cover those costs.

If they become skittish about sinking more money into the U.S. when they are not yet confident where our economy is headed, we will need to raise interest rates - the amount we pay for borrowed funds - to attract the needed capital. This in turn will increase the cost of private borrowing for everything from homes to cars to small business investments; even credit card rates will go up. Instead of borrowing, we could simply print money (a scenario being discussed in many financial circles), but this would greatly devalue the currency and lead to a reduction in the value of Americans' savings.

Critical in avoiding either of these outcomes will be a credible commitment to strengthening the U.S.' fiscal balance sheet at the same time we attend to the balance sheets of the financial sector.


Twelve Principles for Fiscal Responsibility

Download this document

The United States faces a number of serious fiscal challenges. Budget deficits are back, the economy has weakened, Social Security is unsound, growing health care spending is putting immense pressure on the budget, tax policy is at a major crossroads, and borrowing is projected to reach unsustainable levels. Politicians will have to take concrete steps to confront these challenges, and some level of sacrifice will be required. The sooner decisions are made, the better—both because it will give the public more time to adjust and because it will allow us to spread the sacrifices more broadly.

The presidential campaign can either be helpful in this process, by allowing politicians to develop a mandate for change, or damaging, if politicians merely use the election as an opportunity to promise new tax and spending initiatives that would make the situation worse instead of better. It is not surprising that politicians tend to prefer to propose costly new initiatives given that proposals to increase taxes or cut spending are rarely met with appreciation by voters and are almost always met with attacks from political opponents. But considering our current fiscal situation, it is critical that policymakers be willing to address the country’s budgetary imbalances. It will require real leadership to do so.

To help move the political discussion forward, the Committee for a Responsible Federal Budget has put forth "Twelve Principles for Fiscal Responsibility." These principles will help voters ask the necessary questions and develop a better understanding of important fiscal issues, and they will help politicians speak directly to these looming problems in a manner that will prepare the country for the necessary changes ahead. Unless the next president and Congress take action to put our fiscal house in order, they will put the budget, the economy, and the well-being of future generations at risk.

Deficit Bubble Boiling, Trouble is Close Behind

Roll Call | February 28, 2008


In recent years, America has lurched from one economic bubble to the next. Early this decade, the dot-com bubble burst, sending financial markets into a tailspin. As lower interest rates helped to ease the bursting of that bubble, we shifted to over-investing in housing -- again culminating in a tremendous misallocation of resources and economic losses, as we currently are seeing. Now, as we try to contend with the bursting of the housing bubble, we face what may be the most dangerous type of bubble yet: the deficit bubble.

As the economy softens, and Congress is trying to ease the blow with a costly "fiscal stimulus" package, the deficit is again starting to balloon. For the first four months of this fiscal year, the deficit has been twice what it was last year.

Sure, the president's recently released budget projects that we will turn a predicted $400 billion deficit into a surplus by 2012. But these predictions paint a rosy picture of the government's finances by leaving a number of important parts of the budget out. When the Committee for a Responsible Federal Budget made its projections, we, unlike the president, included the costs of continuing to patch the alternative minimum tax and funding the war on terror, among other things. These are not unlikely events -- in fact, they are almost certain to occur -- and everyone in Washington knows it. Under these assumptions, we found cumulative deficits up to $6 trillion over the next decade and the debt quickly growing to unsustainable rates.

Large deficits are a problem for several reasons. First, they crowd out private investment and force us to borrow capital from abroad. Second, they add to the debt, weakening the United States' future borrowing position and increasing the amount of the budget we must dedicate to interest payments to holders of U.S. Treasury bonds. And, they impose large taxes on future generations that have no say in the matter of the debt that is being racked up for them to pay. Try looking your kids in the eye and explaining how that is fair.

Just like all bubbles, we know how this story ends. We overestimated the value of our tech stocks until that bubble burst. We overestimated the value of our homes until that bubble burst. And now we are overestimating the amount that we can borrow and remain financially secure into the future. When that bubble pops, either in the form of skyrocketing interest rates or a currency crisis, the disruption through the economy will be profound.

This bubble is more pernicious than the previous two because when it pops we will be left with almost nothing to show for it. The tech bubble and housing bubble were both caused primarily by overinvestment. When they burst, many people lost a lot of money, and many more were unable to borrow, but at least we were left with fiber-optic cables in the ground and houses around growing cities. Our deficit, on the other hand, primarily finances a consumption-heavy budget that continues to underinvest in education, infrastructure and R&D. Our overspending leaves little in its wake to help us rebuild after a crash.

China and Japan already have begun scaling back the amount of U.S. debt they are willing to take on. Great Britain has picked up most of the slack but cannot be expected to do so forever. As the purchase of our debt slows, we will become less able to pay off old investors with funds from new ones. When our debt comes due, we will have to start dipping into American wallets with higher taxes and lower government spending, forcing Americans to cut back on consumption in drastic fashion.

We have an opportunity to avert disaster by recognizing this bubble before it implodes. The solutions are relatively straightforward. First, budget constraints including credible spending caps and pay-as-you-go rules that require new tax cuts or entitlement programs be fully paid for have to be stuck to without relying on gimmicks. Borrow and spend is not an option.

Second, the budget has to be gradually brought back into balance. None of the presidential candidates running for office has come forth with a realistic plan to balance the budget, but they should -- and we should insist that they do.

Finally, achieving budget balance in the short run will not be enough; legislators have to turn their attention to the spiraling costs of the nation's largest entitlement programs -- Medicare, Medicaid and Social Security. Perhaps it will take a commission; perhaps we should have another summit as we did in 1990; but most importantly, we should stop delaying.

Change comes either through leadership or crisis. There is still a chance of leadership. A crisis triggered by the bursting of the newest deficit bubble would undermine any promise for constructive change in our democracy.

For more details on the projections made by the Committee for a Responsible Federal Budget, please see "A First Look at the President's FY 2009 Budget" and "More Details on the President's FY2009 Budget."

Copyright 2008, Roll Call

Syndicate content