Op-Ed: National debt: The ugly facts

CNN Money | January 17, 2011

The facts are ugly. The federal debt, which has averaged less than 40% of the total economy, now represents more than 60%. It's likely to hit 100% in a little over a decade.

You want more? Here's more.

Pretty much every impartial analyst has declared the situation unsustainable. And many European countries have already been hit by nervous credit markets worried about their debt levels.

Bottom line: If Congress and the president fail to make changes to current policies, the United States will experience some form of a fiscal crisis.

Not a pretty picture. And yet policymakers continue to drag their feet.

When it comes to fiscal policy, the political system is stuck in posturing mode.

Sorry, the abominable $858 billion tax deal President Obama struck with Republicans last month, in which both sides piled on more to the public debt and called it a win-win, does not qualify as my kind of fiscal compromise.

Geithner's debt ceiling warning

It's time for real compromise.

As long as each political party sees an advantage to delaying, we will continue to inch along, closer and closer to that inevitable crisis.

Last week, both Moody's and Standard and Poor's commented on the need for the United States to make changes or jeopardize its triple-A credit rating. A few years back, such warnings would have seemed inconceivable.

The gridlock comes in part from both sides believing they are right.

Republicans view smaller government as promoting more individual freedoms and as better for the economy because it allows for lower taxes. Fair enough.

Democrats see government as serving a more useful purpose -- one that is particularly justified because of the needs of an aging population, years of under investment and growing income inequality. Also legit.

On top of that, both sides blame the other for having made the problem worse for political reasons. Unfortunately, both are right.

Under the Bush administration, Republicans initiated dramatic tax cuts that fundamentally reshaped the structure of our tax system and brought revenues down to 16% of GDP from almost 20%. That decline has pushed down the starting point now that it is time to take steps to increase revenue. The end result will be far more appealing to Republicans. Pretty clever.
Democrats responded by enacting the massive health care entitlement and new layer of government spending. (At least, unlike the tax cuts, the costs of that law were offset.) Federal spending is now on track to grow to 25% of GDP by the end of the decade compared to historical norms of 21%.
None of this is to say Republicans didn't want lower taxes or that Democrats don't want expanded health coverage.
But strategic political motivations were also at play. Political operatives on both sides worked to peg the starting point of future compromise to their advantage.

Most 'absurd' corporate tax breaks

So here we are. Terrific -- both sides have succeeded in making things worse.

But they are also both making a miscalculation if they believe waiting this out plays to their advantage.

As the recent report of the bipartisan fiscal commission demonstrated, we still have a window of opportunity to put together a plan that would be large enough to reassure global credit markets, while preserving central objectives of both the left and the right.

The commission's proposal allows for fundamental tax reform that would improve the efficiency of the tax system. It would raise revenues without relying on a major new revenue source. In particular, it avoids introducing a Value Added Tax, which Republicans rightly worry would be so good at raising revenue that it would reduce pressure to make important spending reductions.

You better believe that every year we wait, that VAT becomes more and more likely.

The commission's proposal also allows for entitlement reforms done progressively. It would require greater contributions from those who can afford them, while protecting benefits -- and in some cases increasing them -- for those who cannot.

By waiting to reform Social Security, we risk shredding the safety net. Such a result is not only unconscionable, it is needless if we act preemptively.

Meanwhile, The talk in the Senate seems to be focused on looking for compromises. Meanwhile, House Republicans and the White House are holding back. But 2011 must be the year of the compromise. Otherwise it is dangerously likely that we will all lose.