Friday, June 25, 2010
Take Prudent Action to Reduce the Debt or Pay More Later
By Gretchen Hamel
Procrastination isn't one of the seven deadly sins, but if one were making a list of deadly economic behaviors, it would surely be near the top of the list.  As the U.S. heads into the G-20 meeting, it should heed the advice it will receive from other countries regarding our fiscal fiasco.
Last week the world learned that European political leaders failed to act when they first became aware of the magnitude of the debt crisis.   As early as February, officials from the U.S. government and the International Monetary Fund (IMF) warned European leaders that the debt problems in countries like Greece had the potential to impact the world economy.  European leaders stalled, hoping that Greece's problems would be contained. 
Unfortunately, their problems became more severe.  
Analysts estimate that the cost of rescuing Greece from bankruptcy would have been $35 billion if measures had been taken when initial warnings were issued. Instead, Europe’s leaders fiddled while Athens burned and now the cost of bailing out Greece is $140 billion.  That additional $105 billion is just a small portion of the total cost of the delayed response to Greece's meltdown. 
Investor confidence in European debt has been profoundly shaken by the Greek crisis, leading to a precipitous drop in the value of the Euro currency, and contributing to stock market declines worldwide.  Europe and the IMF are now creating a $1 trillion fund that can be used to stabilize countries facing potential default. 
In retrospect, it seems obvious that the Greeks ought to have made changes long ago to bring their country's accounts closer to balance.  Similarly, European nations, whose economic futures are wedded to Greece's because of their shared currency and interlocking debt relationships, should have taken action to stabilize Greece before the problem became a crisis. 
Hindsight, as they say, is 20-20, but it seems like Congress is refusing to learn from the stark example Europe has provided. 
Last year, the Congressional Budget Office offered this bleak assessment of U.S. economic prospects:  “Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run.... CBO’s long-term budget projections raise fundamental questions about economic sustainability.” 
President Obama has heard this grim prognosis.  At a townhall meeting last summer, the President himself said: “We can’t keep on just borrowing from China...We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”  
Congress, like Europe, has been warmed.
But they’re fiddling while Washington, and all 50 of the U.S. states, burn. Congressional leaders are currently debating another stimulus, and the debate is about whether to spend $50 billion or a $100 billion, not whether any billions are needed, or, if they are, where to find cuts to make up for the new spending. 
Congress has decided to forgo the budget preparation entirely, with Majority Leader Hoyer explaining that it would be useless to try to budget without hearing the recommendations of the fiscal commission.  Yet one hardly needs a commission to know that the first solution to debt problems is to stop overspending immediately. 
The CBO now expects our debt to reach 90 percent of GDP (more than $20 trillion) by 2020. By then, our interest payments will have quadrupled.  By 2020—that's just ten years from now, when today's first graders are getting driver's licenses—interest payments and our entitlement programs, like Social Security and Medicare, will require 9 out of every 10 dollars in the federal budget.  
Policymakers know the numbers.  They have heard the warnings.  They know our present course is unsustainable.  The question is are they going to do anything about it before it's too late?
Gretchen Hamel is the executive director of Public Notice, an independent, bipartisan, non-profit organization dedicated to providing facts and insights on the effect public policy has on Americans’ financial well being. For more information please visit www.thepublicnotice.org.
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