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Friday, Dec 14, 2012 8:15 PM UTC

$4 trillion no magical cure for debt problem

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Topics: From the Wires,

WASHINGTON (AP) — President Barack Obama has proposed saving more than $4 trillion over the next decade in his “fiscal cliff” talks with Republicans. House Speaker John Boehner has offered a comparable figure, and two years ago an influential bipartisan commission headed by Democrat Erskine Bowles and Republican Alan Simpson suggested $4 trillion as well.

What’s so special about that number?

Nothing really, say many economists. The real key is preventing the enormous $16.4 trillion debt the government owes from growing faster than the now $15.8 trillion U.S. economy.

Following is a look at the parties’ debt-reduction goals as Obama and Congress try figuring out a way around the “fiscal cliff,” a wave of broad tax increases and automatic spending cuts that begin to hit when the New Year begins.

Q: If our debt problem is so bad, is anything wrong with trying to reduce its growth by $4 trillion over the next 10 years?

A: Many economists — but not all — say it’s a good step as long as it’s done in a smart, credible way.

The nonpartisan Congressional Budget Office projects that without a deal to curb annual budget deficits now exceeding $1 trillion, the government’s cumulative debt will climb by an additional $10 trillion over the coming decade. Trimming $4 trillion off that projected growth would ease future taxpayers’ burden in servicing the debt.

Economists say the real objective is to enact tax and spending policies that put the debt on a long-range path so it’s growing no faster than the U.S. economy, and eventually growing slower than the economy. The $4 trillion figure could accomplish that, but there’s nothing magical about that number.

Q: Why is curbing the debt’s growth key?

A: Because if the economy grows faster than the debt, that means the government is probably capable of collecting enough taxes to pay its interest on the debt each year. That, in turn, gives confidence to creditors so they will keep lending money to the government and charging it low interest rates.

Not long ago, the goal used to be balancing the budget. Government deficits have gotten so bad that nobody talks much about that anymore. Instead, the more realistic aim is controlling the debt’s growth in hopes that a stronger future economy lets the government reduce its debt.

Q: Not everyone thinks a deficit-cutting deal like this is needed now. Why?

A: Many liberals would rather focus on stimulating economic growth and creating jobs through government spending. They argue that efforts to control the debt should wait a few years until the economy is sound again. On the other side, deficit hawks wouldn’t mind seeing an even bigger deal now, though they say the bulk of the savings should be timed until later this decade, when presumably the economy will be stronger.

Q: Will the package that Obama and Boehner are working on put the debt on a downward path compared to the economy?

A: That is the big question. Economists say any deal needs to contain long-term reliable savings, like new revenue and steps to reduce the growth of health care programs like Medicare, the big drivers of federal deficits. One-time money-raisers like selling government property or cutting popular programs that lawmakers would likely reverse in coming years would be less credible and give less confidence to the financial markets.

Q: Does the government have a good record of controlling the debt?

A: Not in recent years. That’s thanks in part to the recession of late 2007 to 2009 and low economic growth since then. Annual deficits mushroomed because the economy slowed the growth of federal revenue even as it prompted higher federal spending in efforts to spur employment and help low-income people.

As a result, the national debt — the cumulative money the government owes — exceeded the $15.8 trillion size of the entire U.S. economy this year. The last time that happened was 1947, when the government was still repaying its debts from fighting World War II. In contrast, since the mid-1950s the debt has remained less than 70 percent of the size of the economy — usually well under that — until 2009.

Q: At what point is the ratio too high?

A: Economists disagree on exactly where that number is. A recent study of historic data for 44 countries by economists Carmen Reinhart and Kenneth Rogoff found that nations whose debt exceeded 90 percent of the size of their economies tended to see economic growth slowed by a full percentage point — a damaging reduction no country wants to see. Other experts say there is no clear cutoff point and cite that unpredictability as part of the problem.

“The trouble is you’ll know you hit it when interest rates explode and we’re in a crisis like they are in Europe,” said William Hoagland, a former top GOP Senate budget aide who is now a senior vice president with the Bipartisan Policy Center, a private group that seeks policies both parties can support.

More By Alan Fram.

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