Consumers, banks and businesses have been busy getting their balance sheets into better shape since the U.S. economic recovery began more than three years ago. Now, it’s the government’s turn.
Whoever wins the presidency will contend with a budget on a trajectory dubbed unsustainable by Federal Reserve Chairman Ben S. Bernanke. Barack Obama or Mitt Romney will have to tame a deficit that has topped $1 trillion in each of the past three years, Bloomberg Markets magazine reports in its November issue. How the new president goes about it will influence the direction of financial markets and define the economy and society for his four-year term and beyond.
“We’ve made a lot of progress getting the private-sector balance sheet in order,” says Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “Where we’ve got a lot of work to do is on the public side.”
Research from Harvard University economists Carmen Reinhart and Kenneth Rogoff shows why it’s necessary to do that work. Their data on sovereign indebtedness, which go back more than two centuries, demonstrate that growth has been hobbled when central government debt is more than 90 percent of annual gross domestic product five years in a row. The U.S. is now at the Reinhart-Rogoff debt threshold.
Gross federal debt has exceeded 90 percent of GDP for the past two years and is projected to remain above that level through 2017 at least, according to the White House’s Office of Management and Budget. Even publicly held debt, which excludes the special-issue securities held by the Social Security trust fund and other government agencies, reached 68 percent of GDP in 2011.
‘Subpar Economy’
“It’s not about we’re going to have a financial crisis tomorrow,” Reinhart says. “We’re just going to have this subpar economy.”
The sea of red ink is pushing business executives to get involved in the debt debate and should force political leaders to act, says David Cote, chief executive officer of Honeywell International Inc., who was a member of the debt reduction panel created by Obama and led by former Republican Senator Alan Simpson and former White House Chief of Staff Erskine Bowles, a Democrat.
“We have more debt on a percent-of-GDP-basis today -- by a large amount -- than we did during the Reagan years, World War I, the Civil War, the Revolutionary War,” Cote said at the Bloomberg Markets 50 Most Influential Summit on Sept. 13. The only time the U.S. was deeper in debt was during World War II. “And then, we had a very good reason,” he said.
Debt Clock
Cote is on the steering committee of the Campaign to Fix the Debt, a group pushing for a comprehensive plan to get the federal budget on better footing.
Budget matters have permeated the presidential campaign. At their convention in Tampa, Florida, in August, Republicans displayed a running tally of the rising national debt -- 14 digits, about $16 trillion -- above the stage. A week later, at the Democratic convention in Charlotte, North Carolina, former President Bill Clinton reminisced about the budget surplus at the end of his second term in 2000.
The costs of doing nothing are rising. Unless and until business leaders see that the gridlock in Washington can be broken, they’re going to be reluctant to make investments or hire more workers, according to Cote. The political inaction hurts growth. “What it causes you to do is sit there and say, ‘I’m better off waiting right now. I shouldn’t spend my shareowners’ money until I have some sense of where things are going,’” he said.
Fiscal Cliff
Fear that politicians will be unable to reverse the long- term trend in the debt is compounded, in Cote’s view, by the possibility that they will fail to stop the huge tax increases and spending cuts scheduled to go into effect starting next year. Although leading the country off this so-called fiscal cliff would almost halve the budget deficit, economists say it’s exactly the wrong way to go about it if you want to limit harm to the economy. The abrupt austerity would likely strangle the fragile three-year-old recovery.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, based in Washington, says there’s growing support on Capitol Hill for tackling the debt in a constructive manner. She says she’s hopeful that a “grand bargain” to put the government’s finances on a sounder footing may be possible between a newly elected president and Congress, helped along by the need to deal with the fiscal cliff.
Grand Bargain
The term grand bargain is shorthand for a compromise that addresses the long-term trend of a budget that gets harder to balance as health-care costs rise and the population ages. The goal is to put a deal in place now that shows the government is committed to a plan to shrink the deficit -- without shocking the economy in the near term.
Alan Blinder, a former Fed vice chairman who’s now a professor at Princeton University, says his ideal policy would be $500 billion of stimulus up front coupled with $5 trillion in deficit cuts over the following 10 years. The former is unlikely, he says, with Republicans having made stimulus a dirty word in Washington. And the latter may not happen either, as long as interest rates stay low. Blinder says policy makers will likely tackle the debt piecemeal, with limited changes in the tax code and compromises on spending rather than an overarching agreement.
“There is more discussion about dealing with the deficit than I’ve heard in a long time,” says Howard Gleckman, resident fellow at the Urban Institute and editor of the TaxVox blog. Still, he says he remains skeptical that the talk will translate into action. Like Blinder, he says low interest rates allow policy makers to kick the can down the road.
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