June 26, 2017

Washington Budget Report: Sept. 11, 2012

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‘Strengthening of America’ Initiative Focuses on Reform

With public attention shifting from the party conventions to the fall campaign and the presidential debates that start in early October, advocates of federal budget reform are renewing their calls for more substantial political discussion of the country’s fiscal and economic challenges.

Former U. S. Senators Sam Nunn (D-Ga.), Warren Rudman (R-N.H.), Evan Bayh (D-Ind.) and Pete Domenici (R-N.M.) have convened a bipartisan group of former members of Congress for four public forums on the federal debt and related issues in the weeks leading up to the presidential debates.

The first program is scheduled for tomorrow, Sept. 12, at the Center for Strategic and International Studies (CSIS), 1800 K Street, N.W., Washington. The program, which will run from 9:15 a.m. to 11:30 a.m., will provide an overview of the nation’s fiscal challenges and will feature two former U.S. Treasury secretaries: Robert Rubin and James A. Baker III.

This new initiative, “Strengthening of America – Our Children’s Future,” also involves several organizations, including The Concord  Coalition. Nunn and Rudman serve as Concord’s co-chairmen.

Future sessions will focus on the national security implications of the debt, bipartisan deficit-reduction proposals, pro-growth tax reform, and the critical need to curb rising entitlement costs and health care spending.

“Neither party seems willing to address this issue with either common sense or simple arithmetic,” the four former senators said in a joint statement. “There are current members of both parties, however, who understand the stakes and who are willing to work together by putting the country first. We hope to support, strengthen, and help add to that group.”

In another development, Concord and two other organizations – the Bipartisan Policy Center and The Committee for a Responsible Federal Budget – ran an ad yesterday in Politico urging the nation’s leaders to take “concrete steps toward a long-term debt reduction plan” while dealing with the year-end “fiscal cliff.”

The fiscal cliff involves sharp “automatic” spending cuts and the scheduled expiration of large tax cuts, a combination that economists say could trigger a recession if everything takes effect at once. Officials in both parties have expressed a strong interest in passing legislation to modify at least some parts of the fiscal cliff.

“The President and Congress have received several comprehensive bipartisan plans from elected officials and other budget experts,” the organizations say in the ad. “Use this opportunity to forge agreement.”

Concord also has a new feature on concordcoalition.org to help voters find “key questions” to ask candidates for federal office, along with background information to help evaluate their responses.

Federal Debt Hits $16 Trillion

Treasury Department figures showed the federal debt passing the $16 trillion mark last week, triggering political charges and counter-charges while underscoring the need for elected officials in both parties to take steps to curb its growth.

“What’s really important is how big the debt is relative to our economy and how fast it’s growing, and those things are both kind of alarming,” said Robert L. Bixby, executive director of The Concord Coalition.

The debt is now roughly the size of the U.S. economy, as measured by the Gross Domestic Product (GDP), although $4.7 trillion of the debt is money the government has borrowed from itself. Economists are generally more concerned about how much the government owes investors, which is now roughly $11.3 trillion.

The government on track to run its fourth consecutive $1 trillion-plus deficit in the fiscal year that ends Sept. 30. While the recession and weak recovery have been important factors in these large deficits, current federal policies would result in heavy federal borrowing even after a full economic recovery.

Even at today’s low interest rates, the government is spending about $200 billion a year on interest payments. That is more than we are spending on military operations in Afghanistan -- or on Medicaid. The number will rise rapidly when interest rates return to more normal levels, particularly if the government continues to run up more debt.

Nor does the federal debt figure tell the whole story. In addition to the debt, the government faces tens of trillions of dollars in various unfunded liabilities.

This point is made clear by David M. Walker, former U.S. comptroller general, in his “$10 Million Per Minute” bus tour and with his new U.S. Financial Burden Barometer. According to Walker's Comeback America Initiative, the government's debt, unfunded promises and obligations, and other commitments and contingencies now total $70.4 trillion -- and counting.

Questions Raised on Treasury Bond Risks

Today’s extremely low interest rates on U.S. Treasury bonds reflect the widespread belief that they hold little risk. But recent research and analysis by Marc Joffe, a former Moody’s analyst, raises the possibility that bond markets are underestimating the risks involved in Treasuries -- particularly over the longer term.

Diane Lim Rogers, chief economist for The Concord Coalition, discusses this issue in a new blog post and in a video with Joffe. She finds he makes a strong case.

Joffe notes that rating agencies do not rate public bonds using the same kinds of objective measures they use for private bonds. This, he argues, may understate the risks in Treasuries. He has developed a “Public Sector Credit Framework” designed to illustrate this possibility and, more generally, to raise public awareness of the national debt problem.

“Bond markets appear to be pricing Treasury debt as if it is risk-free,” Rogers writes. “However, if fiscal imbalances are not resolved, bondholders face the risk of losing value due to inflation and could suffer an outright default. While these risks are minimal in the short term, 30-year Treasury bond investors receiving sub-3 percent yields are not being compensated for the risks they are shouldering.”

Meanwhile, the situation simply encourages Washington policymakers to continue borrowing money to finance tax cuts and additional spending.

“But deficit financing is not free,” Rogers writes, “and under-valued risk via low interest rates is just as unsustainable as the path of rising debt.”