U.S. needs to reduce debt

The announcement by Standard and Poor's that Britain could lose its triple-A credit rating because of excessive government debt also serves as a loud and clear warning to the U.S. government, which is piling on debt by the trillions. Certainly, accumulating debt has to be part of the immediate economic-repair strategy. It is borrowed funds that will stimulate the economy and compensate for the deleveraging of the household sector. It costs money — and lots of it — to fix the banking and housing sectors. But just as important as borrowing in the short run is a credible plan for bringing debt levels down once a recovery has taken hold. On that front, the country is dangerously behind.

The chance of a U.S. debt downgrade is actually quite slim, since it is hard to envision a scenario under which the government would default. The United States borrows in its own currency, so debt payments would not bankrupt the country because of currency swings, as they can elsewhere. The United States enjoys the advantage of providing the world's reserve currency, and the recent flight to quality has helped keep domestic interest rates low. Though it is generally not discussed in polite company, the government would monetize the debt, by printing money, before it actually defaulted. Yet the fact is that credit default swaps, which are used to insure against country defaults, have risen in price for U.S. debt as concerns over ongoing borrowing needs have mounted — not a reassuring sign.

The prudent way to manage the debt is to spell out what policies will be enacted to close the deficit once the economy is strong enough. So far that is not happening. The Congressional Budget Office projects that while debt held by the public would be 56 percent of gross domestic product a decade from now under current law, under President Obama's budget it would rise to 82 percent. The president's budget, which includes more than $2 trillion in new tax cuts and nearly that much in new spending increases, relies on $9 trillion in borrowing over the next decade. This is simply unaffordable.

The administration plans to turn attention to the longer-term budget mess next year. But a scheme to get a handle on the debt cannot be delayed. Treasury Secretary Tim Geithner and Office of Management and Budget Director Peter Orszag seemed to send that message when, after the S&P news, they both emphasized the need to do more on closing the budget gap. Until the administration gets specific, financial and currency markets probably will remain skittish, and no economic recovery will be on solid footing.

— The Washington Post

Share This Story