No Laughing Matter

Why the U.S. needs to get serious now about long-term budget deficits

THE OBAMA administration inherited from its predecessor both a tanking economy and a huge federal budget deficit. Under the circumstances, it cannot be faulted for increasing the deficit in the short run, because a mammoth recession called for fiscal stimulus. Thus, it is neither surprising nor irreversibly dangerous that the total federal debt held by the public looks as if it will reach 57 percent of gross domestic product by the end of fiscal 2009 on Sept. 30 -- well above the previous four decades' average of about 40 percent. What is more alarming is that, barring major spending cuts or tax increases, President Obama's budget could drive that figure to

82 percent by 2019, according to the Congressional Budget Office.

We are already getting a taste of the problems that could develop if the president and Congress do not address this soon. Since the end of last year, the interest rate on 10-year Treasury notes has gone up from 2 percent to over 3.5 percent. That number is within historical norms; indeed, Treasury rates probably had been artificially depressed during the financial panic of the fall. But the spike, which will cost the government tens of billions of dollars, also reflects mounting investor concern -- at home and, especially, abroad -- about the U.S. fiscal situation. If government borrowing costs continue to accelerate, they could kill economic growth for years to come.

It was a sign of the times that Treasury Secretary Timothy F. Geithner had to travel to Beijing this week to reassure China, the world's largest holder of Treasury debt, that lending money to the U.S. government is still a wise thing to do. Mr. Geithner insisted that, "in the United States, we are putting in place the foundations for restoring fiscal sustainability." To be sure, China doesn't have many good alternatives to parking its massive trade surpluses in dollars. But it does have some, including commodities and the debt of more fiscally prudent European governments. In a moment that all Americans should consider a wake-up call, Mr. Geithner was met with laughter when he told a group of Chinese students that their country's assets were "very safe" in Washington.

The chairman of the Federal Reserve, Ben S. Bernanke, was considerably more decorous than the Chinese students in testimony before Congress on Wednesday but, in essence, only slightly less skeptical. "Even as we take steps to address the recession and threats to financial stability," he said, "maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance."

Mr. Bernanke did not say explicitly that there is no such plan in Mr. Obama's budget -- at least not according to the CBO, whose estimates of the president's budget show annual deficits lingering indefinitely above 4 percent of GDP. Nor did he point out that Congress has yet to come up with credible financing for the president's desirable but expensive health-care proposal. He did not say that Mr. Obama and Congress have done nothing so far to deliver on the president's pledge of entitlement reform. But if the Fed chairman had said those things, he would have been absolutely right.