Can Federal Commission Really Close the Budget Deficit?

Now that the federal budget deficit is poised to eat the U.S. economy alive, it’s got our attention.

Economists and policy wonks—those who dissect consumer price indexes and look at government spending as a percentage of gross domestic product—have long warned that the federal government needs drastic action to address debt and avoid a budget meltdown.

But now even people who don’t know a CPI from a GDP are paying attention. And they’re mad.

Tea Party grassroots demonstrators have struck up a noisy chorus against the deficit in protest to a federal government that has added to the red ink. People polled by Gallup in March ranked the federal budget deficit as the nation’s most important long-term problem. The sudden interest came after not even cracking the top-three list of problems for more than a decade.

“It is like a cancer. It just destroys the country from within,” said Erskine Bowles, co-chairman of President Obama’s new fiscal commission, which meets next week.

The deficit ballooned to $1.4 trillion last year because of the stimulus and financial bailout laws, war spending, lower tax revenue during the recession and soaring health care costs. Financial collapses in Europe have helped focus public attention on the issue. And Bowles is hopeful that will lead to action.

“When the public is angry, politicians respond,” he said in an interview with the Bulletin.

Obama has warned of a coming “day of reckoning” on the deficit and debt. Federal spending of $3.6 trillion far exceeds the $2.13 trillion in tax receipts this year.

“This is going to require people of both parties to come together and take a hard look at the growing gap between what the government spends and what the government raises in revenue,” Obama said when he convened the National Commission on Fiscal Responsibility and Reform in April. “And it will require that we put politics aside—that we think more about the next generation than the next election. There is simply no other way to do it.”

The public is angry

“Public anger is helping to set the table for the commission. But they are the ones who are going to determine which foods are served,” said Larry Sabato, director of the Center for Politics at the University of Virginia. And once the commission sets that menu—comes up with a list of recommendations—it will be up to Congress to decide what to swallow.

“Everyone agrees we have a problem,” Sabato said. ”The rub is Republicans don’t want to raise any tax and Democrats don’t want to reduce much, if any, domestic spending. That’s why we are in the mess we are in.”

Bowles’ forecast? “Every single decision is going to be painful,” he said.

The commission is led by former Sen. Alan Simpson, a Wyoming Republican, and Democrat Bowles, who was chief of staff in the Clinton White House. Six lawmakers from each party sit on the panel, as do four presidential appointees from the private sector.

They are looking at options like raising taxes or changing the tax code, reducing spending, and changing entitlement programs like Social Security. The panel’s charge is to improve the long-term picture and in the short term to put the federal budget back in balance by 2015, with the exception of payments on the debt.

Without changes, a demographic influx of retirees and spiraling health costs mean Social Security and Medicare will “eat the entire economy over the next 50 years,” said Jeffrey Miron, director of undergraduate studies in economics at Harvard University and a senior fellow at the libertarian Cato Institute.

Economic dynamics force action

Here are some of the economic realities that have moved the debt and deficit issue to the front burner:

• Just two years ago the federal debt held by the public equaled about 40 percent of the nation’s economic output, which was about average. The figure shot up to 62 percent this year—the highest level since World War II. Under current law it will jump to 80 percent by 2035, a figure that worries economists because it could lead to higher interest rates for consumers and businesses, and to financial instability.

And if Congress doesn’t stick to politically unpopular plans like allowing tax cuts to expire at the end of the year and slashing Medicare repayments to doctors, debt will amount to 185 percent of the economy by 2035. That’s like a family owing nearly twice as much on its credit cards as the whole town earns in a year.

• Interest payments on the debt will quadruple, as a percentage of the economy, by 2035 and take up one-sixth of every dollar the government can spend.
  
  

• Without changes, federal spending on mandatory health care programs will grow from 5 percent of the entire economy to 10 percent in 2035.