Progressives and the National Debt

Today, the Center for American Progress and the Center on Budget and Policy Priorities held a forum, “Progressives and the National Debt: Consequences and Solutions.” Panelists included Alan Blinder, Laura Tyson, Roger Altman, Paul Krugman, Robert Reischauer, Senator Mark Warner, David Cutler, and William Gale, among others. Although the event labeled the panels as “progressives,” the discussions reflected notable ideological differences among the speakers.

While deficit reduction is often seen as a centrist or even conservative position, conference panelists highlighted the importance of the issue for progressives. Speakers emphasized that progressives need to recognize the threat the federal debt poses to progressive priorities.

Overall, the majority of panelists agreed that the United States faces a very real and serious fiscal crisis, and if we fail to act to bring down future deficits once the economy recovers, our creditors will force the necessary changes on us. CRFB has argued this exact point many times, and thus called for the adoption of a fiscal consolidation plan. Several panelists even explicitly cited the need for the United States to “pre-commit” to a fiscal reduction program.

The panelists generally saw three possible outcomes in the face of a large and growing debt over the coming years, with speakers differing in which they saw as most likely:

• The economy will give. Either inflation will soar as a reaction to unprecedented measures taken by the government and Fed to restore credit markets and demand (not seen as very likely to occur), or long-term interest rates will rise as creditors demand higher rates in the face of a greater risk that the U.S. government could default, or the dollar will sharply depreciate due to capital flight reflecting loss of confidence in the US economy by US creditors (both foreign and domestic). To stem the sharp and disorderly movement of the dollar, the Fed must increase interest rates but interest rates will rise in any event as savings are withdrawn.
• The political system will give, forcing policies that added to the deficits to sunset
• Congress and the Administration will act responsibly in addressing long-term deficit and debt issues in order to preserve credibility for the U.S. government and economy.

Despite the draconian consequences of failure, nearly every speakers voiced genuine skepticism that the Administration and Congress could produce the kind of deficit reductions needed to restore fiscal sustainability.

The panelists also generally agreed that we must:

• Not withdraw stimulus activities until the economy is on a clear recovery path
• Commit to address fiscal problems once we’re out of the recession
• Stabilize the debt/GDP ratio. To do so, the priorities are to reduce spending, increase revenues, and improve productivity in the health care sector, and changes must happen relatively soon to avoid very painful decisions later.

In addressing these problems, the speakers broached the issue of taxation a few times. William Gale argued that the tax base has become too narrow, creating higher rates than would exist otherwise, while also commenting on the inefficiency and over-complexity of the tax system. He argued that the government’s revenue scheme needs improvement, perhaps from a value-added tax (VAT), because we cannot close the long-term fiscal gap under the present tax system.

Perhaps the most important points made at the forum were that when economies are unstable, collapse can be triggered by non-economic events; and the longer we wait for fiscal retrenchment, the harder and more painful it will become to adopt the necessary changes.