Roll Call | July 22, 2009
With all the exhausting economic challenges America faces today, we all might be inclined to put the alarm clock on snooze and hope to dream it all away. But it’s time to wake up, America. It’s time for the president to map out a fiscal recovery plan to sustain our children, our grandchildren and our country’s future.
The current reality is bleak. Consumers aren’t spending; banks aren’t lending; housing prices are still headed down; and unemployment continues to climb. While it is too soon to know whether to heed them, calls for another round of stimulus are increasing.
At the same time, the country faces massive deficits from all the borrowing to help fix the economy, as well as longer-term budget imbalances driven by aging and health care costs. Realistic projections show the debt growing indefinitely, to unsustainable levels. The administration’s budget plan would add trillions of dollars to the debt, not even counting the money that is being used to try to fix the economy.
Managing the seemingly contradictory goals of providing the economy with sufficient stimulus, but doing so in a fiscally responsible manner, is quite a challenge.
The solution is to continue with stimulus policies as necessary, but at the same time, the president should immediately announce a plan to reduce the deficit and close the long-term fiscal gap. Announcing the plan today, though it would only be phased in once the economy is strong enough, would help the country regain its fiscal credibility and would also be critical for the recovery.
It would be premature and potentially damaging to begin significantly reducing our budget deficits and enormous federal debt as the economy struggles to find its footing. But continuing to borrow hand-over-fist with no end in sight also jeopardizes any economic recovery. Already, “bond vigilantes” have pushed up interest rates on fears over higher inflation or default from an unsustainable U.S. debt outlook. And our major foreign creditors, including China, Russia, Brazil, and South Korea, have publicly cautioned the United States about the huge debt buildup — an early sign that we may not be able to continue borrowing cheaply from them in the future. Higher interest rates — a likely outcome of ongoing large borrowing needs — threaten both to choke off recovery and to add to federal interest costs.
In light of massive government borrowing, it is now more critical than ever for the U.S. government to have fiscal credibility. During times of economic and financial crisis, we must work to minimize the cost of new borrowing and maintain the confidence of creditors, taxpayers and financial markets. Waiting too long to lay out a plan to put the budget back on a sustainable path, or adding more stimulus into the economy without explaining how the debt will be paid off in the future, will ultimately lead to a fiscal crisis with a sharp runup in interest rates as investors demand compensation for their fears of hyperinflation or default, or a rapid fall in the dollar as creditors seek less risky investments elsewhere. Once markets and investors have lost confidence in the United States, it will be extremely hard for us to get it back. Experience in many foreign countries, including those in the European Union, suggest that advance announcements of what economists call a “medium term fiscal consolidation plan” can help avert fiscal crises.
Once an economic recovery is on solid footing, the fiscal recovery plan should be implemented gradually. Any such plan would likely include changes to the largest entitlement programs, other areas of government spending, and the revenue side of the budget. Specific policies might include raising the retirement age, scaling down government entitlement benefits for the well-off, and eliminating government programs the Office of Management and Budget finds to be outdated or inefficient. Introducing real specifics to a realistic budget plan will not only serve to reassure markets and strengthen an economic recovery, but it will also offer the public a realistic understanding of what will be necessary to fix the disastrous budget situation we now face.