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May 25, 2005

On the Deficit

Robert Rubin:

Attention: Deficit Disorder - New York Times: Most pressing is the 10-year federal deficit, which most independent analysts project at $4.5 trillion to $5 trillion.... Over the longer term, Social Security has a 75-year estimated deficit of $4 trillion, while the different components of Medicare, including its new prescription drug benefit, represent a fiscal problem of roughly $20 trillion.... [O]ver time, sustained deficits crowd out private investment, increase interest rates, and reduce productivity and economic growth.... [F]ar more dangerously, if markets here and abroad begin to fear long-term fiscal disarray and our related trade imbalances, those markets could then demand sharply higher interest rates for providing long-term debt capital and could put abrupt and sharp downward pressure on the dollar. These market effects, plus the adverse impact of continuing fiscal imbalances on business and consumer confidence, could seriously undermine our economy.

We have managed to avoid these market effects so far because private demand for capital has been relatively limited, and because the central banks of Japan, China and other countries have provided large inflows of foreign capital. A change in either of those circumstances, or simply a change of market psychology for whatever reason, could, however, turn these interest rate and currency risks into a reality....

We must have serious spending discipline and entitlement reform - though any entitlement reforms likely to be proposed would have little immediate effect.... [The revenue] shortfall is especially pressing given the rapid increases in entitlement costs and the need to finance national security, investments in education and infrastructure and other critical programs.... [R]evenue-increasing measures must reverse the recent trend of disproportionately favoring upper-income taxpayers.... [I]f the tax cuts for those earning above $200,000 were repealed and the inheritance tax as reformed were continued rather than eliminated, the 10-year projected deficit would be reduced by roughly $1.1 trillion, or almost 25 percent, and the 75-year fiscal reduction would be roughly $3.9 trillion, or approximately equal to the Social Security shortfall....

Dana Milbank:

On the eve of a titanic partisan clash in the Senate, eggheads of the left and right got together yesterday to warn both parties that they are ignoring the country's most pressing problem: that the United States is turning into Argentina.... Stuart Butler, head of domestic policy at the conservative Heritage Foundation, and Isabel Sawhill, director of the left-leaning Brookings Institution's economic studies program, sat down with Comptroller General David M. Walker to bemoan what they jointly called the budget "nightmare."

There were no cameras, not a single microphone, and no evidence of a lawmaker or Bush administration official... they agreed that without some combination of big tax increases and major cuts in Medicare, Social Security and most other spending, the country will fall victim to the huge debt and soaring interest rates that collapsed Argentina's economy and caused riots in its streets a few years ago. "The only thing the United States is able to do a little after 2040 is pay interest on massive and growing federal debt," Walker said. "The model blows up in the mid-2040s. What does that mean? Argentina."

"All true," Sawhill, a budget official in the Clinton administration, concurred.

"To do nothing," Butler added, "would lead to deficits of the scale we've never seen in this country or any major in industrialized country. We've seen them in Argentina. That's a chilling thought, but it would mean that."

Each of the three had a separate slide show, but the numbers and forecasts were interchangeable.... The unity of the bespectacled presenters was impressive -- and it made their conclusion all the more depressing....

The congressional staffers, accustomed to sitting on opposite sides of the room in such events, seemed flummoxed by yesterday's unusual session in the Rayburn House Office Building. One questioner suggested Republicans are to blame for multiple tax cuts; another implied the problem is a Democratic appetite for spending. The bipartisan panel would not be goaded. "I'm willing to talk about taxes if you're willing to talk about entitlements," Butler offered...

Posted by DeLong at May 25, 2005 02:33 PM