Congress, resolve to fix deficit and debt

There are many New Year’s resolutions that would have been nice for our government to have made last week, but there was a vital one that should have been made — and kept. That is: We (the president and Congress) resolve to get serious this year about reducing government spending, balancing the federal deficit and begin paying down the country’s enormous debt.

Perhaps the greatest disappointment of last year is that neither President Barack Obama nor either party in Congress took even the smallest step toward addressing the debt burden. As of Jan. 3, the national debt totaled $15.186 trillion, slightly more than 100% of the gross domestic product, a figure that the Congressional Budget Office in 2010 forecast wouldn’t be reached until beyond 2020.

So much for government forecasts.

Keep in mind that the debt-to-GDP burdens of Greece and Italy, at 144% and 118%, respectively, have shaken the world financial markets, and the United States isn’t that far behind them.

DEBT AT HORRENDOUS LEVEL

When the National Commission on Fiscal Responsibility and Reform, headed by former Wyoming Sen. Alan Simpson and former White House chief of staff Erskine Bowles, presented its report in December 2010, the national debt was 62% of GDP, up from 33% in 2001. That is, it surged almost 40% in one year.

The Simpson-Bowles Commission laid out a well-reasoned plan to bring the growth of the national debt under control over a number of years through a combination of tax reform, increased revenue and spending cuts.

If it had been adopted, the plan would have started with modest spending cuts in 2012, so as not to weaken the economic recovery, which has been fragile at best.

Next year, discretionary spending would have been cut by $102 billion, and by 2020, $1.661 trillion would have been cut. Reforms to mandatory spending programs such as Medicare and Social Security would have cut their costs by $556 billion by 2020, and so-called tax expenditures would have had to be deleted from the tax code, for a savings of $785 billion.

An additional $673 billion would have been saved through reduced interest payments on the national debt.

Overall, through the Simpson-Bowles proposals, $3.885 trillion could have been cut from federal deficits by 2020. Shortly thereafter, if discipline were maintained, the federal government could achieve budget surpluses, and because it would no longer need to borrow to finance its operations, it could begin to reduce the outstanding debt.

But unlike Greece, Ireland, Italy, Spain and the United Kingdom, the United States has taken no steps to cut its budget deficit and address its long-term debt problem. Mr. Obama ignored the Simpson-Bowles report and its well-thought-out proposals, and neither the Republicans who control the House, nor the Democrats who control the Senate saw fit to act on its recommendations.

DRASTIC MEASURES NEEDED

The national debt is like a cancer growing within the U.S. economy, sucking its lifeblood in the form of interest payments sent overseas to foreign lenders. If treatment isn’t soon undertaken, it eventually will weaken the economy.

The Simpson-Bowles Commission proposed a balanced mix of surgery (spending cuts) and chemotherapy (additional revenue) first to slow the growth of the cancer and eventually to cause its shrinkage. Although the commission’s report was ignored by both the executive and legislative branches of government, and though the cancer has grown rapidly since December 2010, it isn’t too late to begin treatment.

The simplest and quickest way to get the process started would be for Mr. Obama, House Speaker John Boehner, R-Ohio, or Senate Majority Leader Harry Reid, D-Nev., to introduce the Simpson-Bowles recommendations in a legislative proposal and let the negotiations begin.

If action on something such as Simpson-Bowles isn’t taken soon, investors should prepare for inflation, the time-honored and subtle way for governments to default on their excessive debts.