Party Gridlock Feeds New Fears of a Debt Crisis
WASHINGTON — Senator Evan Bayh’s comments this week about a dysfunctional Congress reflected a complaint being directed at Washington with increasing frequency, and there is broad agreement among critics about Exhibit A: The unwillingness of the two parties to compromise to control a national debt that is rising to dangerous heights.
After decades of warnings that budgetary profligacy, escalating health care costs and an aging population would lead to a day of fiscal reckoning, economists and the nation’s foreign creditors say that moment is approaching faster than expected, hastened by a deep recession that cost trillions of dollars in foregone tax revenues and higher spending for safety-net programs.
Yet rarely has the political system seemed more polarized and less able to solve big problems that involve trust, tough choices and little short-term gain. The main urgency for both parties seems to be about pinning blame on the other, before November’s elections, for deficits now averaging $1 trillion a year, the largest since World War II relative to the size of the economy.
Mr. Bayh, the centrist Democrat from Indiana, lodged his complaint about excessive partisanship and Congressional gridlock on Monday by way of explaining his decision not to seek re-election. But he is hardly alone in sounding an alarm about the long-term budgetary outlook, which has Medicare, Medicaidand Social Security costs growing at unsustainable rates and an inefficient tax system that cannot keep up.
“I used to think it would take a global financial crisis to get both parties to the table, but we just had one,” said G. William Hoagland, who was a fiscal policy adviser to Senate Republican leaders and a witness to past bipartisan budget summits. “These days I wonder if this country is even governable.”
Sensing political advantage, Republicans are resisting President Obama’s call for a bipartisan commission to cut the debt, although recent studies have implicated the tax cuts and spending policies of the years after 2000 when they controlled Congress and the White House. Even seven Republican senators who had co-sponsored a bill to create a commission nonetheless voted against it recently.
The president is not giving up. On Thursday he will sign(ed) an executive order establishing the 18-member National Commission on Fiscal Responsibility and Reform, naming as co-chairmen Alan K. Simpson, a former Republican Senate leader from Wyoming, and Erskine Bowles, a moderate Democrat from North Carolina who, as President Bill Clinton’s White House chief of staff, brokered a 1997 balanced budget agreement with Congressional Republicans.
“There isn’t a single sitting member of Congress — not one — that doesn’t know exactly where we’re headed,” Mr. Simpson said in a telephone interview Tuesday just before word of his role got out. “And to use the politics of fear and division and hate on each other — we are at a point right now where it doesn’t make a damn whether you’re a Democrat or a Republican if you’ve forgotten you’re an American.”
While he criticized some liberal Democrats’ refusal to reduce entitlement benefits, Mr. Simpson also dismissed Republicans’ antitax arguments that deficits could be controlled with spending cuts alone. “But they don’t cut spending,” he said, referring to the years Republicans governed with President George W. Bush.
Elected Republicans, however, are under intense pressure from their party’s conservative base to oppose any tax increases — a line in the sand that dims any prospects for bipartisan cooperation. Yet economists, including veterans of past Republican administrations, are vocal in insisting that the debt problem is too great to be solved without increasing revenues somehow and perhaps moving to a new consumption tax system like Europe’s.
The same economists also say a significant deficit-reduction plan is not possible unless Mr. Obama breaks his campaign promise not to raise taxes for households making less than $250,000. Last week, Mr. Obama said he would not impose that condition or any other on a fiscal commission.
The situation is complicated by a debate over how quickly Washington should act even if it could. The Obama administration, Congressional Democratic leaders and many economists are pushing for additional government stimulus measures while the private sector remains weak. But anger about big deficits has stoked the populism roiling politics, and Republicans as well as some conservative Democrats want to cut spending right now as a way of addressing perceptions among voters that government has gotten too big, too intrusive and too profligate. Mr. Obama himself proposed a budget that would freeze spending on some categories of domestic spending for three years.
Many analysts say the president and Congress could send a strong signal to global markets by agreeing this year to a package of both long-term tax increases and spending reductions, especially in the popular entitlement programs, that would not take effect until 2012. That is the recommendation of two new studies, one from a diverse group sponsored by the National Academy of Sciences and a separate joint project of the Peter G. Peterson Foundation, the Pew Charitable Trusts and the Committee for a Responsible Federal Budget.
As debt rises, so do interest costs; by 2014, at a projected $516 billion, they will exceed the budget for annual appropriations for domestic programs. The government will be competing with the private sector for credit, forcing interest rates higher and imperiling future prosperity.
Foreign investors now own more than half of the publicly held debt, and officials for the largest creditor, China, have fretted publicly about the fiscal course of the United States. While few expect foreigners to dump their assets, since the resulting plunge in values would hurt them as well as everyone else, the fear is that investors will demand higher interest payments and reduce or stop future debt purchases, threatening the government’s ability to finance its borrowing.
Lesser financial and fiscal crises have brought the two parties together to compromise on tough choices about taxes and spending. They include the 1983 accord between President Ronald Reagan and a Democratic-controlled Congress that reduced the financial strains on Social Security, based on proposals from a commission led by Alan Greenspan, and budget agreements in the 1990s that contributed to a four-year run of surpluses at the end of the decade.
Those bipartisan deals were done during times of divided government, when one party had the White House and the other controlled at least one chamber of Congress, giving each side some governing responsibility to find solutions. Now, with Democrats controlling the White House and Congress, the parties have less incentive to work together.
Republicans today see opposition as a way back to power in November, and their party is more ideologically antitax than in the past, especially now that it is courting the Tea Party movement. Conservative activists so oppose compromise of any sort that several lawmakers have drawn primary challengers for working with Democrats.
Because the worst of the fiscal problem remains years away and therefore somewhat hypothetical to most people, there is also not the same incentive to act immediately that drove, for example, the 1983 deal, when Social Security was facing an imminent crisis.
“We literally tweaked the Social Security system,” Mr. Simpson said. The changes, which still are being phased in 27 years later, resulted in big savings over time. Economists say future measures will have to be more severe the longer they are delayed.
In 1987, a global markets crash led the Reagan administration and Democrats to agree to a deficit-reduction package of spending cuts and tax increases. In 1990, the successful budget summit between Democrats and the administration of President George Bush came about after deficits had spiked again, threatening a fiscal crisis of mandatory and deep across-the-board cuts.
Yet Mr. Bush’s breaking of his “no new taxes” promise so infuriated conservatives that they helped defeat him in 1992. One of his critics was Newt Gingrich of Georgia. By the mid-1990s, Mr. Gingrich was House speaker and his party controlled Congress. After a politically damaging government shutdown, in 1997 he reached a deal with Mr. Clinton that helped balance the budget.When George W. Bush took office in 2001, the government projected surpluses of $5.6 trillion for the coming decade
In an analysis of what happened next, the economists Alan J. Auerbach and William G. Gale found that much of the accumulated debt owes to Bush-era policies and to the recession, with its costs in lost income taxes and automatic benefits for the unemployed. The one-time costs of stimulus and bailout measures are “really small stuff” relative to the rest, Mr. Auerbach said.
More than Mr. Obama could have imagined, the situation now tests his promise to break Washington’s gridlock and to lead in making “the hard choices.”
Privately, Treasury Secretary Timothy F. Geithner and other administration officials are courting Republicans with assurances of the administration’s sincerity about bipartisanship. Publicly, and with advice from some out-of-office Republicans, the White House is applying pressure by repeatedly reminding Americans of the mess Mr. Obama inherited.
Polls are helping the administration make its case, people in both parties say. In the latest New York Times/CBS News poll, Americans by a two-to-one ratio say Mr. Obama is trying to work with Republicans, while by more than two-to-one they say Republicans are not reciprocating. As for the deficit, 41 percent say the Bush administration is most to blame, 24 percent say Congress and 7 percent say Mr. Obama.
Yet politicians’ failure to reduce deficits has long reflected voters’ opposition to the necessary steps. The poll also found that by a two-to-one ratio Americans oppose cutting health care and education; 51 percent oppose lower military spending.
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February 8, 2010
Pg. 21
China’s Debt Bomb
America’s No. 1 creditor holds the ultimate weaponBy Arthur Herman
“‘He who pays the piper calls the tune”: That old saying captures perfectly America’s growing dependence on our No. 1 creditor in the world, Communist China.
By their carelessness Congress and the Obama administration are steadily handing over control of America’s economic and financial future to a handful of Chinese officials and generals in Beijing. Those who think the Chinese won’t use that control if they feel they have to are ignoring history — and the Chinese.
The ancient military strategist Sun Tzu said that the best strategy was to render an opponent’s army helpless even before the battle began. America may still have the biggest and best military in the world.
But many at the Pentagon are starting to realize that, thanks to our growing fiscal irresponsibility, we may be surrendering control of America’s destiny to a rival superpower — and all without a shot being fired.
Consider the scale of the problem.
With President Obama’s 2010 budget, 42 cents of every dollar the federal government spends will have to be borrowed. In the last decade, foreign investors have wound up lending us roughly half of all federal debt — with just two countries, China and Japan, providing nearly half of that sum, or 44 percent, through the purchase of US Treasury securities.
China now tops Japan as our biggest lender by some $30 billion a year, at $789 billion. (By comparison, our No. 3 lender, Great Britain, comes in at a measly $277 billion).
But that’s not all. As its booming economy becomes more global, China is also the world’s largest holder of foreign-currency reserves. Most of that is in US dollars. Indeed, without most Americans realizing it, China has become the largest foreign holder of US dollars in the world. How many dollars foreign exchange traders at the Bank of China decide to sell or buy on any given day is increasingly determining whether the dollars in our purses and wallets buy a little or a lot.
Seen from one angle, this dependence on China for the value of our national currency and the funding of our debt is like our dependence on inexpensive Chinese exports for our standard of living: the inevitable fruit of today’s interlocking global economies — and poor planning on our part.
Seen from another, more strategic angle, it may spell disaster.
History shows that nations that can’t control their economic fortunes don’t control much else. Debt freezes destinies — as every credit-card holder knows.
Europeans discovered that after World War II, when they lost the power to make major decisions without first checking with their lender-in-chief, the United States. At that time, we used our economic dominance to rebuild Europe, not reduce it to impotence.
On the other hand, If US-China relations continue to deteriorate — over arms sales to Taiwan, Internet freedom issues, Chinese industrial espionage and a Chinese military build-up that looks more and more like it’s directed at challenging US power in Asia — our lenders-in-chief in Beijing may not be so scrupulous.
Indeed, back in 1999, the Chinese literally wrote the book on how to use economic asymmetries as a blunt instrument, entitled “Unrestricted Warfare.”
It draws no meaningful distinction between military, economic and political force (including using cyberspace) as means to defeat an enemy. Instead, it shows how a nation can dominate its opponents not with planes, ships and soldiers, but with foreign exchange rates, trade embargoes and armies of computer hackers.
Suppose that in retaliation for some slight China decides to stop buying Treasury bonds, forcing our debt to cost us even more. A furious US Congress hits back with trade sanctions. China then responds by driving up the price of the dollar, crippling US exports — or, alternately, it crashes the dollar by dumping its foreign reserves, even as Chinese computer hackers slow down our banks’ ability to respond to the crisis.
No one will call this a war. But it will certainly fit the classic definition of war as politics by other means. And the Pentagon knows it.
Last March, the Pentagon held its first-ever economic-warfare war game, with China as the putative opponent and with economists and bankers (including from UBS) helping out.
Details of what unfolded are still classified. However, sources told Fox Business News that the scenario played out as planned. That was the good news.
The bad news is that China won.
Today, some experts argue that rational self-interest will prevent China from waging this kind of economic warfare, because crippling the US would also severely wound its own economy. However, on an issue like Taiwan or Japan, rational judgment can take a backseat to national pride, and the desire to reverse old humiliations.
That war game was almost a year ago, when the Federal deficit was half of what it is today. And China is moving out of its short-term debt positions — although slowly enough not to roil the credit markets.
The real issue is whether we get our fiscal house in order, and realize that a $12 trillion national debt and a crippled economy could leave us as vulnerable as we once were on a December Sunday morning 69 years ago, at Pearl Harbor in 1941.
Arthur Herman’s most recent book, “Gandhi and Churchill,” was a Pulitzer Prize finalist last year.
- Wall St. Journal, Feb 17, 2010
- Can Washington Meet the Demand to Cut Spending?
Americans have reached a consensus. What’s lacking is trust.
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By PEGGY NOONAN
President Obama’s decision to appoint Erskine Bowles and Alan Simpson to his bipartisan commission on government spending is politically shrewd and, in terms of policy, potentially helpful.
It is shrewd in that he is doing what he has been urged to do, which is bring in wise men. Here are two respected Beltway veterans, one from each party. It shows the president willing to do what he said he’d do when he ran, which is listen to other voices. The announcement subtly underscores the trope “The system is broken and progress through normal channels is impossible,” which is the one Democrats prefer to “Boy did we mess up the past year and make things worse.” And the commission gets some pressure off the president. Every time he’s knocked for spending, he can say “I agree, it’s terrible. Help me tell the commission!”
It’s potentially helpful in that good ideas may come of it, some rough and realistic Washington consensus encouraged.
Is it too late? Maybe. Even six months ago, when the president’s growing problems with the public were becoming apparent, the commission and its top appointees might have been received as fresh and hopeful—the adults have arrived, the system can be made to work. Republicans would have felt forced to be part of it, or seen the gain in partnership. Now it looks more as if the president is trying to save his own political life. Timing is everything.
Associated Press People are freshly aware and concerned about the real-world implications of a $1.6 trillion dollar deficit, of a $14 trillion debt. It will rob America of its economic power, and eventually even of its ability to defend itself. Militaries cost money. And if other countries own our debt, don’t they in some new way own us? If China holds enough of your paper, does it also own some of your foreign policy? Do we want to find out? And there are the moral implications of the debt, which have so roused the tea party movement: The old vote themselves benefits that their children will have to pay for. What kind of a people do that?
It has been two or three years since I have heard a Republican or conservative say deficits don’t matter. Huge ones do, period. As for Democrats and new spending, the air is, for now, out of the balloon.
A question among Republicans is whether to back, as a party, Rep. Paul Ryan’s road map, his far-reaching and creative attempt to cut the deficit and the debt. The Congressional Budget Office says its numbers add up: It would, actually, remove the deficit in the long term. But the Ryan plan is, inevitably, as complicated as the entitlements it seeks to reform, involving vouchers and tax credits, cost controls and privatization. It is always possible that this is right for the moment, for the new antispending era. But the party itself has some other jobs right now, and one of them is to encourage the circumstances that will make real change possible. Here the abstract collides with the particular.
In the long run the Republicans have to do two things, and one they probably cannot do alone, or rather probably cannot do without holding the presidency, and a gifted president he would have to be. They have to prepare the ground for an American decision—a decision by a solid majority of America’s adults—that they can faithfully back specific cuts in federal spending: that they can trust the cuts will be made fairly, that we will all be treated equally, that no finagling pols will sneak in “protection” for this pet interest group or that power lobby, that we are in this together as a nation and can make progress together as a nation.
Second the Republicans should tread delicately while moving forward seriously. Voters are feeling as never before in recent political history the vulnerability of their individual positions. There is no reason to believe they are interested in highly complicated and technical reforms, the kind that go under the heading “homework.” As in: “I know my future security depends on understanding this thing and having a responsible view, but I cannot make it out. My whole life is homework. I cannot do more.”
We are not a nation of accountants, however much our government tries to turn us into one.
Americans lack trust that government will act in good faith, which is part of why they’re anxious. They look at every bill, proposal and idea with an eye to hidden horrors.
The good news is the new consensus that America must move forward in a new way to get spending under control. The bad news is we don’t trust Washington to do it. And in the end, only Washington can.
Paul Ryan is doing exactly what a representative who’s actually serious should do—putting forward innovative and honest ideas for long-term solutions. He should continue going to the people with it, making his case and seeing how they respond, from the Tennessee Tea Party to the Bergen County, N.J., Republican Club. Maybe a movement will start, maybe not. But it’s a good conversation to be having.
The GOP itself should be going forward with its philosophy, with the things it’s long stood for and, in some cases, newly rediscovered, and painting the broader picture of the implications of endless, compulsive high spending. Those lawmakers who have a good reputation in this area—Sen. Tom Coburn is one—should be moved forward more prominently. Congressmen who focus on earmarks, on controllable spending, are doing something wise. They are trying to demonstrate that those who can be trusted with small things—cutting back what can be removed now—can be trusted with larger things.