Debt Wish: Dark Days Ahead

January 30, 2013

Debt Wish: Dark Days Ahead

Earlier this month it was reported President Obama said, “We don’t have a spending problem.” And now it seems that a growing chorus is joining the president on this claim, arguing that five straight years of trillion dollar deficits and a national debt of more than $16 trillion are no cause for concern. Yet leading experts say otherwise, including former Federal Reserve Vice Chairman Alan Blinder, who earlier this week called trillion dollar deficits “stupefying.” Additionally, high levels of debt are associated with low levels of growth. With our debt-to-GDP ratio now on track to reach 200 percent by 2040, let’s hope Washington wakes up before the American dream turns into a nightmare.

WE DON’T HAVE A SPENDING PROBLEM.”

Growing Chorus Emerges Around The Idea That Spending And Trillion Dollar Deficits Aren’t A Real Problem

President Obama: “We don’t have a spending problem.”  (Stephen Moore, “The Education of John Boehner,” The Wall Street Journal, 1/6/13)

White House Press Secretary Jay Carney: “Deficit reduction is not a worthy goal unto itself.” (Daniel Halper, Carney: “Deficit Reduction Is Not A Worthy Goal,” The Weekly Standard, 1/10/13)

Sen. Mary Landrieu (D-LA): “I am not going to keep cutting the discretionary budget–which, by the way, is not out of control despite what we hear on Fox News.”(Congressional Record, p. S322, 1/28/13)

Paul Krugman: “On my list of things to worry about, the long-term deficit is number five or six.  It just doesn’t belong up there. … We are not actually running up debt any faster than we should.” (Paul Krugman, MSNBC’s Morning Joe, 1/28/13)

New York Times Columnist Gail Collins: “You have to give my guy [Paul Krugman] credit, he said all along, look people are worried, they’re worried and they’re screaming … ‘inflation’, ‘loss of confidence’, all these things and they haven’t happened.  They haven’t been the problems.  The problems haven’t been inflation.  The problems haven’t been loss of faith in our credit.  The problem has been a lack of juice for the economy.” (Gail Collins, MSNBC’s Morning Joe, 1/29/13)

BUT LEADING EXPERTS SAY OTHERWISE

“Stupefying” Deficits Could Have Costly Consequences:

Former Federal Reserve Vice Chairman Alan Blinder: “The federal government borrowing more than a trillion dollars a year? That’s a stupefying number. … That spells less business investment, less homebuilding, fewer automobile sales, and so on.” (Alan S. Blinder, “How to Worry About the Deficit: (1) Don’t; (2) Wait a Few Years; (3) Then Worry About Healthcare Costs,” The Atlantic, 1/25/13) 

Former Treasury Official Steve Rattner: “We are borrowing (stealing?) from our children to pay far more in benefits to seniors than we are paying into the system. We have something like $60 trillion in unfunded liabilities to Medicare and Social Security. Paul Krugman would like us to just wait until those programs run out of money, at which point those unfunded liabilities would be just that much larger.” (Joe Scarborough, Editorial: “Paul Krugman vs. the world,” POLITICO, 1/28/13)

MSNBC’s Joe Scarborough: “How long will politicians fool themselves into believing that their version of a Washington-based trickle down economics will save America from itself? When will they figure out that our economy will grow from the bottom up when Washington cuts the debt, balances the budget and finally gets out of our way?” (Joe Scarborough, Editorial: Trickle-down liberalism and a decade of debt,” POLITICO, 1/27/13)

Council on Foreign Relations President Richard Haass: ”As I argued to @NYTimeskrugman on #Morning_joe, the deficit deniers are right until the day they are wrong. & that will be one costly day.” (Richard Haass, Twitter, 1/28/13)

Fitch Ratings: U.S. Credit Could Be Downgraded Without “Credible” Plan To Reduce Deficit In Six To 12 Months. “Fitch warned that the United States could still face a debt downgrade if policymakers don’t pull together a ‘credible’ plan to reduce the country’s massive deficit over the medium term, which it defines as six to 12 months.” (Luciana Lopez, “Fitch backs away from downgrade of U.S. credit rating,” Reuters, 1/28/13)

Fed Survey: “U.S. Should ‘Urgently Enact A Plan That Puts It On A Path Toward A Sustainable Budget Deficit.’” “Wall Street is sending a sharp and unambiguous message to Washington: cut spending and solve the deficit problem now and don’t do it with more revenue. The January CNBC Fed Survey finds eight of 10 respondents agreeing with the statement the U.S. should ‘urgently enact a plan that puts it on a path toward a sustainable budget deficit.’” (Steve Liesman, “Wall Street to Washington: Cut Deficit Now,” CNBC, 1/29/13)

HIGH LEVELS OF DEBT ASSOCIATED WITH LOW GROWTH, LONG-TERM HARM TO ECONOMY

SHOT: GDP Slows As Debt Levels Rise. “Perhaps the biggest finding is that high levels of public debt have been associated with lower growth. The vast majority of the episodes — 23 of the 26 — coincided with substantially slower growth, and average annual growth was 1.2 percent lower during periods with debt-to-GDP levels above 90 percent (2.3 percent growth) than below 90 percent (3.5 percent growth). (Larry Swedroe, “How Our National Debt Hurts Our Economy,” CBS, 11/12/12)

CHASER: Debt Expected to Reach 200 Percent of GDP By 2040. “Scheduled spending cuts from the 2011 budget deal, combined with the fiscal cliff agreement, put the debt on track to reach 200 percent of GDP by 2040, five years later than was projected prior to the passage of the two deals. … Many economists suggest keeping debt at or below 60 percent of GDP, with research showing that economic growth slows for countries that have debt levels exceeding 90 percent of economic growth.” (Vicki Needham, “US debt headed toward 200 percent of GDP even after ‘fiscal cliff’ deal,” The Hill, 1/29/13)

Lower Standard Of Living And Fewer Opportunities For Americans.  ”Historically, America’s strong growth and high living standards were built on our relatively smaller government. The ongoing surge in federal spending is undoing this competitive advantage we had enjoyed in the world economy. CBO projections show that without reforms federal spending will rise by about 10 percentage points of GDP by 2035. If that happens, spending by American governments will be more than half of GDP by that year. That would doom young people to unbearable levels of taxation and a stagnant economy with fewer opportunities. (Chris Edwards, “The Damaging Rise in Federal Spending and Debt,” Cato, 9/20/11)

In The Long Term The Economy Will Suffer. “Even if you buy the broad Keynesian arguments for deficit-funded stimulus, there are inevitably tradeoffs to boosting the economy in the short-run through added government spending. Choices that keep the economy up now will hurt it later.” (Peter Suderman, “The Keynesian Tradeoff: Boost the Economy Now and You’ll Slow Growth Later,” Reason.com, 11/9/12)

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