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Obama’s claim that the debt problem can ‘go away’

at 06:00 AM ET, 08/10/2011


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“And by the way, these choices are not radical. When it comes to getting a sustainable debt level, if we went back to the rates that existed when Bill Clinton was president and we made some modest adjustments to Medicare that preserved the integrity of the system, our long-term debt and deficit problems would go away. And most people here wouldn’t notice those changes.”

— President Obama, August 8, 2011

The president made these remarks during a fundraiser in Washington on Monday night, and they struck us as interesting, given the political turmoil in Washington over exactly how to reduce the federal budget deficit.

Would it really be that easy to make the debt problem “go away”?

The Facts

First of all, Obama seems to have misspoken when he said “get back to the rates that existed when Bill Clinton was president.” That suggests that he would eliminate all of the tax cuts enacted under George W. Bush, when his policy is to eliminate for people making more than $250,000 a year.

Though Obama does not mention it, he also appears to be already counting on the budget savings outlined in the recent debt-ceiling deal he reached with Congress. Under that agreement, budget caps and other items amount to deficit reduction of $917 billion over 10 years, and a special congressional committee is supposed to come up with another $1.5 trillion in deficit reduction, including savings from interest on the debt.

That strikes us as a bit like counting your chickens before they hatch. If the committee does not reach an agreement, then spending is still supposed to be reduced by at least $1.2 trillion.

Though the president did not mention it, administration officials say he also is counting on savings from reducing troops levels in Iraq and Afghanistan — about $1 trillion over ten years.

Under White House budget office calculations, administration officials say, the combined effect of these policy changes means that the debt as a percentage of the nation’s economic activity, the gross domestic product, begins to decline as early as 2017, whereas under Congressional Budget Office assumptions, that debt ratio stops growing.

But the president spoke of achieving “sustainable debt level” and also eliminating the long-term debt problem. There does not appear to be a standard definition, but the executive order establishing the National Commission on Fiscal Responsibility and Reform spoke of balancing the budget by 2012 and stabilizing the debt-to GDP ratio at an “acceptable level.”

In 2010, when the commission, chaired by Alan Simpson and Erskine Bowles, issued its report, the debt-to-GDP ratio was 62 percent and projected to reach 90 percent by 2020. The commission set a goal of stabilizing the debt by 2012 and reducing debt to 60 percent of GDP by 2023 and 40 percent by 2035.

The debt-to-GDP ratio is expected to hit 71.7 percent this fiscal year. Under budget calculations shared by administration officials, the ratio would reach 75 percent in 2013 before the debt ceiling agreement, the joint committee’s $1.5 trillion in deficit reduction (which could include Medicare cuts) and the reduced war expenses prompt a decline to 72.7 percent by the end of Obama’s hoped-for second term.

By 2012, under this budget path, the ratio would be 69.3 percent in 2021, still far above the commission’s goals.

Still, the administration’s calculations show that the deficit would be below 3 percent of GDP starting in 2014; most economists consider total deficits of around 3 percent of GDP to be economically sustainable. Moreover, “primary deficit” — when the budget is balanced except for interest on the debt — would be reached in 2015.

The Committee for a Responsible Federal Budget has a nifty web calculator in which you can plug in various options to achieve a goal of stabilizing the U.S. debt. You have to choose from eight different categories of spending and revenues, and it is remarkably difficult to stabilize the debt, especially if Social Security is left untouched and only “modest adjustments” are made to Medicare, as the president put it.

We plugged in all sorts of cuts and kept ending up with this warning: “Uh oh! You failed to reduce the debt to a sustainable level. Without further changes, a fiscal crisis is likely to occur.”

The looming retirement of the baby boom generation is going to place significant demands on the federal budget. (Bloomberg Businessweek has a sobering view of how the debt crisis is much worse than Washington politicians frequently portray it.)

The last line of the president’s statement — “most people here wouldn’t notice those changes” — is revealing. He was speaking to a group of well-off Americans. The budget cuts necessary to end the debt problem will likely fall mostly on poorer Americans.

The Pinocchio Test

We are not going to quibble with the administration’s math, but we think the president’s rhetoric was a bit simplistic. There are no easy solutions. Already, the discretionary budget cuts contained in the debt ceiling deal will result in dramatic reductions in spending. (We take no opinion on whether that is good or bad, but it certainly will mean a smaller federal government.)

Moreover, even making these changes will not make our long-term debt and deficit problems “go away.” If the numbers turn out right, the president could argue he was beginning to stabilize the situation by the end of his second term.

But he also has a responsibility to speak hard truths to the American people. As retirement and health costs continue to climb, the debt problem will continue to challenge policy-makers for decades to come — especially if the two political parties continue to have such dramatically different ways to tackle the problem.

One Pinocchio

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    About the Blogger

    Glenn Kessler has covered foreign policy, economic policy, the White House, Congress, politics, airline safety and Wall Street.

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