Washington Gridlock and the Possibility of a New Debt Crisis

This snippet says it all:

• “I used to think it would take a global financial crisis to get both parties to the table, but we just had one,” said G. William Hoagland, who was a fiscal policy adviser to Senate Republican leaders and a witness to past bipartisan budget summits. “These days I wonder if this country is even governable.”

Via The New York Times:

• Senator Evan Bayh’s comments this week about a dysfunctional Congress reflected a complaint being directed at Washington with increasing frequency, and there is broad agreement among critics about Exhibit A: The unwillingness of the two parties to compromise to control a national debt that is rising to dangerous heights.
• After decades of warnings that budgetary profligacy, escalating health care costs and an aging population would lead to a day of fiscal reckoning, economists and the nation’s foreign creditors say that moment is approaching faster than expected, hastened by a deep recession that cost trillions of dollars in lost tax revenues and higher spending for safety-net programs.
• Yet rarely has the political system seemed more polarized and less able to solve big problems that involve trust, tough choices and little short-term gain. The main urgency for both parties seems to be about pinning blame on the other, before November’s elections, for deficits now averaging $1 trillion a year, the largest since World War II relative to the size of the economy.
• Sensing political advantage, Republicans are resisting President Obama’s call for a bipartisan commission to cut the debt, although recent studies have implicated the tax cuts and spending policies of the years after 2000 when they controlled Congress and the White House. Even seven Republican senators who had co-sponsored a bill to create a commission nonetheless voted against it recently.
• “There isn’t a single sitting member of Congress — not one — that doesn’t know exactly where we’re headed,” Mr. Simpson said in a telephone interview Tuesday just before word of his role got out. “And to use the politics of fear and division and hate on each other — we are at a point right now where it doesn’t make a damn whether you’re a Democrat or a Republican if you’ve forgotten you’re an American.”
• While he criticized some liberal Democrats’ refusal to reduce entitlement benefits, Mr. Simpson also dismissed Republicans’ anti-tax arguments that deficits could be controlled with spending cuts alone. “But they don’t cut spending,” he said, referring to the years Republicans governed with President George W. Bush.
• Elected Republicans, however, are under intense pressure from their party’s conservative base to oppose any tax increases — a line in the sand that dims any prospects for bipartisan cooperation. Yet economists, including veterans of past Republican administrations, are vocal in insisting that the debt problem is too great to be solved without increasing revenues somehow and perhaps moving to a new consumption tax system like Europe’s. [Dec 11, 2009: NYT - Many See the VAT Option as Cure for Deficits]
• The same economists also say a significant deficit-reduction plan is not possible unless Mr. Obama breaks his campaign promise not to raise taxes for households making less than $250,000.
• As debt rises, so do interest costs; by 2014, at a projected $516 billion, they will exceed the budget for annual appropriations for domestic programs. The government will be competing with the private sector for credit, forcing interest rates higher and imperiling future prosperity.
• Foreign investors now own more than half of the publicly held debt, and officials for the largest creditor, China, have fretted publicly about the fiscal course of the United States. While few expect foreigners to dump their assets, since the resulting plunge in values would hurt them as well as everyone else, the fear is that investors will demand higher interest payments and reduce or stop future debt purchases, threatening the government’s ability to finance its borrowing.
• Lesser financial and fiscal crises have brought the two parties together to compromise on tough choices about taxes and spending. They include the 1983 accord between President Ronald Reagan and a Democratic-controlled Congress that reduced the financial strains on Social Security, based on proposals from a commission led by Alan Greenspan, and budget agreements in the 1990s that contributed to a four-year run of surpluses at the end of the decade.
• Because the worst of the fiscal problem remains years away and therefore somewhat hypothetical to most people, there is also not the same incentive to act immediately that drove, for example, the 1983 deal, when Social Security was facing an imminent crisis.
• ... politicians’ failure to reduce deficits has long reflected voters’ opposition to the necessary steps. The poll also found that by a two-to-one ratio Americans oppose cutting health care and education; 51% oppose lower military spending.

[Aug 26, 2009: US Federal Budget in Pictures]
[Jun 12, 2009: NYT - America's Sea of Red Ink was Years in the Making]