In the Nation's Interest

The “Lost Decade”

Followers of the issue of the federal budget deficit and the public debt have been worried for years. In fact, typical citizens probably have come to hear experts' warnings as a cross between "The sky is falling!" and "Wolf!"

Now, those cries are beginning to ring true. But many people probably still hesitate to accept the message. Perhaps a picture can begin to make that message clear.

The chart above was a part of a comprehensive Webinar on the new budget.  You can hear the entire Webinar and see the complete package of charts here

A little more than two years ago, in December of 2007, the Congressional Budget Office released long-term budget projections. Assuming no change in policy, the debt would rise faster than our nation's income (that is, as a percentage of the gross domestic product - like a family's mortgage that grew faster than its income), gradually at first but at an ever-accelerating rate. By the end of 2022, the debt would reach 60 percent of the GDP - the highest level since 1952 (and the maximum allowed for members of the European Monetary Union, by the way).

At that time, budget worriers saw this outlook for a rising public debt as extremely, well, worrisome.

But consider what has happened in the two short years that followed. In December of 2007, the economy was just entering its worst recession since the Great Depression, and a financial meltdown was in its early stages. The economic and financial jolt that followed increased the budget deficit sharply, and necessary policy responses to catch the economy from an even greater decline worsened the budget still more. (A key argument for fiscal responsibility is that "gump happens," and keeping the debt low allows borrowing room to respond to such emergencies.)

As a result of this bad budget news, the public debt is now virtually sure to reach 60 percent of the GDP at the end of this year - 2010.

Consider the implications: Two years ago, budget scholars worried that the nation faced a major debt crisis, with only a few short years to prepare and to address the problem. But now, beyond the two years that have intervened, we have lost 12 years before the debt hits a major danger signal - and the debt continues rising rapidly.

Economist Richard Berner of Morgan Stanley made an important point in remarks delivered yesterday. He noted that in the late 1990s, many believed that the budget improved because of gridlock in Washington - tax cutters couldn't cut taxes, and big spenders couldn't spend. Whether that was true or not, the situation now is fundamentally worse. The debt is so much larger, and the interest cost of servicing that debt is rising so fast, that gridlock no longer helps. If our policymakers fail to act, the situation will worsen - fast. The nation needs action. Those who believe that refusal to negotiate in good faith will win a political victory are playing politics with the nation's future. Our leaders - from both political parties - must lead.

Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.

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