December 21, 2014

A Sense of Urgency About the Nation's Fiscal Challenges

When a panel of fiscal experts took the stage at The Concord Coalition’s annual Economic Patriots Dinner last week, nobody was expecting a lot of happy talk about the federal debt. But the immediate sense of urgency may have caught some listeners off-guard, with one panelist -- Robert Rubin, former Treasury secretary -- warning about a possible “implosion” if large numbers of investors suddenly lost confidence in the United States.

The panel members did not sound particularly optimistic that elected officials would take appropriate action anytime soon, although Sen. Kent Conrad did see a “glimmer of hope” that President Obama’s bipartisan fiscal commission could produce recommendations backed by the required 14 of its 18 members.

Conrad, chairman of the Senate Budget Committee, received Concord’s annual Paul E. Tsongas Economic Patriot Award at the dinner Tuesday in New York. Other panel members were Concord Co-Chairman Bob Kerrey and David Walker, CEO of the Comeback America Initiative. Peter G. Peterson, Concord’s founding president, served as moderator.

“We are on the cusp of real danger and real risk,” Conrad warned. He worried that the rapidly growing federal debt could at some point not only hurt economic growth but cause a “severe break” in the value of the dollar. Rubin echoed his concern.

“While the timing is unpredictable,” Rubin said, “it seems to me someplace in here -- it could be well out in time, but it also could be . . . much closer in time -– we could really have an implosion not only in the currency . . . but in the bond market, the two together.” He and Kerrey both suggested that the need to raise the federal debt limit next year might trigger big problems.

Walker pointed out that investors are already growing skittish about 30-year Treasury bonds because of fears about inflation and the future value of the dollar. “There’s already a signal,” he said. “We’re selling debt but we’re selling short-term debt.”

In the longer term, the nation is clearly headed for a fiscal meltdown. Absent fundamental changes in policy, more and more of the federal budget will be required to cover interest payments and finance the big entitlement programs as additional baby boomers retire and health care costs continue to soar. 

But as the panel discussion emphasized, long-term problems can sometimes turn into immediate crises faster than many people could imagine. That is a painful lesson that several European countries are currently absorbing. 

Elected officials in the United States obviously need to start making a fundamental change in course. But without an immediate crisis, are they capable of doing so?

The panelists were not terribly encouraging on this point. Conrad, for example, said Democrats and Republicans alike are in “deep denial” about what needs to be done.

He did, however, sound one upbeat note in discussing the President’s National Commission on Fiscal Responsibility and Reform, which has a Dec. 1 deadline to issue recommendations.

Conrad, who serves on the commission, said that in the past he had estimated the chances that 14 members of that group could reach agreement at only 5 to 10 percent. At a commission meeting last week, though, he saw for the first time a “glimmer of hope” that 14 members of that group could agree on a package of recommendations. 

But he also said this would require “an act of God,” which sounds a little tentative. And as Rubin quickly reminded everyone, anything the commission recommended would still need congressional approval to take effect. Nobody was really betting on that scenario.

Peterson observed that “there seems to be general agreement that it will take a crisis” to prompt elected officials to take appropriate action.

Kerrey emphasized that campaign donors should quit writing checks to political candidates who refused to offer specific plans to put the nation on a more responsible course. The only crisis that will really register with those candidates, he said, was seeing potential donors closing their checkbooks.

The former senator also laid out the moral case against loading up the children of baby boomers with huge amounts of debt, noting that “we are already shifting tremendous amounts of income from one generation to another.”

While this is happening, voters and elected officials are giving lip service to the importance of treating future generations fairly -- of building a stronger and more prosperous country to pass on to them. Yet if we don’t move beyond mere rhetoric, today’s current economic difficulties may end up being remembered as the good old days.