Dealing With The Debt

In today's Financial Times, Roger Altman asked " whether the credit standing and currency stability of the world's biggest borrower, the US, will be jeopardised by its disastrous outlook on deficits and debt."

Altman explains that:

America's addiction to debt poses [a] threat now. To avoid an imposed and ugly solution, Mr Obama will have to invest all his political capital in a budget agreement next year. He will be advised that cutting spending and raising taxes is too risky for his 2012 re-election. But the alternative could be much worse.

In particular, Altman is concerend that continued debt accumulation could cause a global financial crisis, a concern which we share. To avoid this crisis, policy makers should enact a plan now to stabilize the debt once the economy recovers (preferably at 60 percent of GDP).

So far, policy makers have been unwilling to take such bold but necesary action. There are two positive signs in today's news, though.

First, Senator Conrad has pledged to release a budget blueprint which would reduce the deficit to 3 percent of GDP by 2015.  That means either less spending or more revenue (or both) than the President's budget.

Meanwhile, the President's Deficit Commission will hold its first meeting next week. This commission is tasked with developing a bi-partisan plan to bring the deficit down to about 3 percent of GDP by 2015, while making improvements to the longer term fiscal picture.

Both Conrad and the commission share a goal -- that is a first step. We would prefer something a little more ambitious, and that focused on debt rather than deficits, but this is certainly a good start.

The important thing is that we start passing changes into law now -- or as soon as practically possible. Failure to do so, as Atlman explains, could threaten our economic wellbeing.