Other CRFB Papers

Wake Up, America! We Need a Fiscal Recovery Plan

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.
 
 

 

My View: Declaring Fiscal Independence

Mankato Free Press | July 2, 2009


As we prepare to celebrate the Fourth of July, many Americans are beginning to wonder whether we’ll ever be independent of the huge financial debt our nation is amassing.
 
That’s because our federal government, in response to the current economic crisis, has pledged trillions of dollars in the form of loans, credits, and outright grants (all handily accounted for now at www.stimulus.org). This federal money is all intended to stimulate the economy and pave the road to recovery.
 

But now doubts are surfacing about the federal government’s response to the recession. According to a recent Wall Street Journal/NBC News poll, less than half the country believes the controversial stimulus package will pay off. The poll found that independent voters, in particular, “are developing gnawing fears about government spending” and that “a solid majority — 58 percent — said that the president and Congress should focus on keeping the budget deficit down, even if takes longer for the economy to recover.”

As always, the American people are savvy. They are right to see that America is taking on unprecedented levels of debt — even as bigger long-term fiscal problems with Social Security, Medicaid and Medicare threaten to darken our years ahead. These entitlement programs are currently unsustainable, and must be reformed if the U.S. is to avoid yet another major fiscal crisis. In fact, earlier this week the Congressional Budget Office (CBO) released long-term projections that were considerably worse than previous predictions. CBO’s new projections warn that deficits will hit 7.5 percent of Gross Domestic Product (GDP) by 2020, almost 15 percent by 2035, and well over 40 percent by the end of the 75-year budget window — if we continue current spending policies. Deficits — and the ensuing debt — of this magnitude will cripple our economy and punish future generations. We must not let this happen.
 
To set a more responsible course, we need to declare our independence from deficit spending. In order to do so, we must rely on common sense principles for governing and budgeting. Here are four simple principles for our elected leaders to consider and adopt.
 
1) Stop borrowing. If something is important enough for the government to do, it is important enough to pay for it either by raising taxes or cutting other spending. That means having the courage to make tradeoffs. Lawmakers may be able to pay for some part of their agenda through reducing waste, fraud, abuse — but that’s not the heavy lifting these times require. Set priorities.
 
2) Be honest with the numbers. Thomas Jefferson wrote that honesty is the first chapter in the book of wisdom. Our leaders must calculate the costs of new initiatives and their tradeoffs fairly and honestly. It will only make matters worse in the long run if we use misleading assumptions about costs or savings — or, worse, rely on budget gimmicks. Don’t play games.
 
3) Plan ahead. Look to the future and anticipate the costs of the babyboom retirement. We know that before long there will be twice as many retirees drawing Social Security, Medicare and Medicaid benefits. That alone will explode the cost of these programs well beyond the taxes being collected to support them. Begin now to enact policy changes (perhaps delaying the retirement age or capping COLAs?) that can be phased in over time. Be fair to the younger workers who will otherwise bear the burden of higher taxes to support these programs. Get ahead of the curve.
 
4) Reach across the aisle. Solutions to today’s (and tomorrow’s) budget challenges will not be easy. And, solutions will not be possible if both political parties simply point fingers and place blame. It may be true that in recent years neither party has demonstrated the will to be truly fiscally responsible. But, that must change — and both parties need to take responsibility and contribute their best ideas to get our fiscal house back in order. Work together.
On Independence Day, we celebrate leaders who demonstrated uncommon courage and foresight. In order to maintain our fiscal independence, we need to see a bit more courage and foresight from today’s leaders.
 
 
Former U.S. Rep. Timothy Penny is the co-chairman of the Committee for a Responsible Federal Budget, a nonpartisan budget watchdog group in Washington DC. More at www.crfb.org.
 

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