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June 10, 2011

America’s Public Debt: Destination clear, but ooh what route to take???

Posted by Carla Sateriale[1]

At a Capitol Hill seminar last Tuesday here in Washington DC, four former Congressional Budget (CBO) directors shared their perspectives on how the US Congress could squeeze the federal deficit to temporarily avoid a breach of the debt-ceiling, which, if no action is taken, is expected to reach its allowed limit on August 2nd. The panel consisting of Alice Rivlin, Rudolph Penner, Robert Reschauder, and Douglas Holtz-Eakin, who collectively have 22 years of experience in directing the CBO, perhaps more importantly also discussed the long-term prospects and remedies for US public finances, which are hampered seemingly not by a lack of agreed fiscal targets, but more by a lack of concrete measures that are politically acceptable to both parties.

The prevailing tone of the Q&A seminar (which was moderated by Phil Joyce, professor at the Maryland School of Public policy, author of a recent institutional history of the CBO, and part-time PFM expert for the IMF) was marked by both consensus on policy medicine and skepticism towards the political process to agree to take it.  A recurring mantra was that both policy and procedural changes were necessary for Congress to stabilize the debt and deficit in the long term.  Each of the four panelists acknowledged the biggest structural problems stemmed from Medicare and Medicaid—which are both growing at a rate substantially faster than GDP.  However, because of the imminence of the debt ceiling and the nature of the restructuring required for these huge programs, the restructuring will need to be done gradually. Therefore, discretionary spending cuts will need to be on the immediate fiscal agenda, despite the fact that discretionary spending is not the source of the problem. On the revenue side, it was noted by Ms. Revlin that the tax base needs broadening, and tax code reform needs to eliminate the incentives which effectively translate spending into tax exemptions. The panel lamented that competing ideologies within Congress will only hinder progress towards fixing the problems, as the most reasonable solutions, like an implementation of VAT, and gradually scaling back social benefits (through better targeting and linkage to income), will each be opposed by opposing parties.

When asked whether the occurrence of a debt default might spark motivation to cut the deficit, the consensus was that any default, no matter how small, would be thoroughly unwise. Mr. Holtz-Eakin noted that because payment credibility is hard-earned and provides significant monetary savings, the US can’t afford to test the faith of foreign markets. The panel agreed that several gradual increases in the debt ceiling coupled with policy changes will be the most likely short-term scenario, but a large increase in the debt ceiling would not be politically viable.

An interesting point raised was whether the American public sufficiently understands the extent to which Medicare, Medicaid, and Social Security programs are unsustainable at their current levels. Mr. Reschauer noted that where austerity programs have been effective outside the US, their success has been conditional on the public supporting the cuts. In some countries, particularly Canada, the government has been able to successfully instill a negative emotional reaction to high public debt.  If this attitude could take root in the US, the political challenges of how and where to trim the budget might pose less of a threat. As the panel noted, it will be difficult to convince the American public of the evils of debt, given the pervasiveness of mortgages and student loans, which Americans perceive as “good debt.”

Despite the skepticism for the success in the political arena, the overall prescription was simple and (economically) feasible: in the short term, Congress will need to slowly raise the debt ceiling while broadening the tax base and cutting discretionary spending. If changes are not made to Medicare, Medicaid, and Social Security, the US will face huge and unsustainable deficits in the years ahead. Finally, America needs to hear the message: Beware of high public debt!

The seminar was presented by University of Maryland’s School of Public Policy and Georgetown University Press.


[1] Carla Sateriale is Research Assistant for the two Public Financial Management Divisions in the Fiscal Affairs Department of the IMF. As graduate student and US citizen she has a direct vested interest in minimizing her personal share of public debt.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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