Op-Ed: A Fiscal Deal or a Fiscal Crisis?

Politico | April 1, 2013

Now that Congress and the president have agreed to fund the government for the rest of this fiscal year — removing the threat of a government shutdown — Washington should use this opportunity to get past the crisis-driven fiscal policy of recent years and put the focus squarely where it belongs: on the long term.

I’m often called a “deficit scold,” so it may surprise some people to know that my primary concern is not this year’s budget deficit or next year’s. I believe the principal threat to America’s future is our unsustainable long-term debt and deficits, the damaging effect they would have on our economic growth and competitiveness, and the unconscionable burden they would place on our children and grandchildren.

I have spent much of my life putting private capital to work, and I know that Washington’s tax and spending decisions —and indecisions—can have a major impact on private sector investment. More confidence in America’s fiscal future is essential if we want to spur businesses to put their trillions in idled capital to work.

Unfortunately, all of the recent fire-drill fiscal agreements — the Budget Control Act of 2011, the fiscal cliff deal, sequestration — have done very little about our long-term structural debts. Shorter-term discretionary expenditures such as R&D, education, and infrastructure have taken the hardest hits, despite the fact that we need more, not less, of these investments in today’s far more competitive global economy.

Even after these recent budget deals, over the next 30 years, public debt is projected to race past an unprecedented 200 percent of GDP. This dangerous trajectory of debt poses two threats to our economy.

The first is a financial market crisis, similar to what’s unfolded in Europe. Rising debt, combined with repeated political crises and gridlock, could cause markets to decide that we aren’t going to get our fiscal house in order. No one can predict when such a crisis might hit, but if it does, it’s likely to be sudden, significant, and sharp. Today’s low interest rates — which are providing false comfort to some — would quickly rise and severely damage an already fragile economy.

The other threat is far easier to predict: a slow-growth crisis, in an economy that is starved of badly needed investments. Over the next quarter-century, even if interest rates rise only to historically average levels, interest costs on public debt are projected to soar to about four times the total federal investment in R&D, education, and non-defense infrastructure combined. Those of us who believe more investment is needed in this technological and competitive global economy also have a responsibility to advocate for policies that ensure we have the resources to pay for it.

It’s become a cliché to say that “everything must be on the table” in fiscal negotiations, when it is clear that everything has not been on the table. At various times, defense, taxes, and entitlements have all been taken off the table.

As to defense, there are significant opportunities for smart, strategic savings geared to the threats of a new era — not the crude, across-the-board cuts of the sequester.

On taxes, Republicans must acknowledge the need for additional revenue to achieve a lasting bipartisan solution. Simple math makes any reform package without revenues not only draconian, but politically impossible. Relying solely on spending cuts to stabilize debt at sustainable levels would require cutting nearly one-third of the overall budget. Tax reform that raises revenue by reducing deductions would be economically beneficial and more feasible politically.

At the same time, President Obama should lead his fellow Democrats — and the entire nation — to solutions that tame the growing costs of Medicare, Medicaid, and Social Security. With rising health care costs and 78 million Baby Boomers retiring, these programs account for 100 percent of the projected long-term increases in federal non-interest spending.

Two principles of entitlement reform should prevail. First, we simply must preserve the safety net for the vulnerable. Reforms should start by asking the relatively well-off to contribute more and receive less. And those who advocate for the status quo must remember that doing nothing is the worst thing we can do for low-income families — without reform, we’re headed toward an economic and political crisis in which no program is safe.

Second, retirees need time to plan for policy changes. Our leaders should agree now on reforms to Medicare and Social Security, so that people have time to prepare. Of course, entitlement reform that exempts those nearing retirement requires that we reach an agreement now—we can’t afford to delay both the decision and the implementation.

The suggestion that Washington should focus on economic recovery today and long-term debt reduction later presents a false choice. Our leaders can walk and chew gum at the same time. And entitlement reform with delayed implementation by definition won’t harm the recovery. To the contrary, a comprehensive plan that stabilizes long-term debt would generate much-needed confidence in all sectors — business, consumer, financial markets — that would in turn stimulate the short-term economy.

And let’s also dispense with the notion that we can “grow our way out” of our long-term debt problem. This is a fantasy. It would take double or triple our projected long-run economic growth rate to fix our fiscal imbalances — highly unlikely.

Ultimately, I believe the most persuasive argument for addressing long-term debt is moral. If we do nothing, we will leave more than $50 trillion of unfunded promises on the backs of our children and grandchildren over the next 50 years. As the great theologian Dietrich Bonhoeffer wrote, “The ultimate test of a moral society is the kind of world that it leaves to its children.” Can anyone argue that over $50 trillion in debt is a morally justified legacy to leave future Americans?

Our long-term debt is a transcendent threat to our future. There has been too much denial, diversion, and delay. The time for action is now.