Budget deficit & Public debts – Short term priority vs Long term crisis

At 85, this longtime deficit pessimist is somewhat optimistic. “There’s been amazing progress in the last two years on recognition of the problem,” Petersons tells us the accompanying video.

Peterson, Former Commerce Secretary 

Peterson’s foundation recently conducted a survey of former economic officials – Treasury Secretaries, White House economic advisers, central bank officials – and asked whether they believed the fiscal situation was sustainable, and how strongly they felt about it. The result: “100 percent of the former officials said it is unsustainable and felt very strongly about it.”

As Peterson noted: “I spent five years of my life in the market research business, and I had never seen” this type of unanimous response.

Deficit Talk vs. Action

Of course, former officials often prove to be more reasonable and focused on long-term issues than current officials. And that would seem to be precisely the problem. The first action Washington took after last November’s election was to make the deficit larger– with Republicans and Democrats signing off on a deal to extend the Bush-era tax cuts and temporarily reduce the Social Security payroll tax. With both parties now invested in the performance of the economy through the 2012 election, there’s little appetite for swift austerity measures.

Peterson says that’s OK. “If you look like all you care about is doing something about the deficit now, you look like you’re totally unaware of the short term problems the economy has,” he said.

The optimal approach: “Have a reasonable stimulus program but link it to a long-term plan” that goes into effect as the economy covers, he says. For as scary as the current numbers are – a projected fiscal 2011 deficit of about $1.5 trillion – “the real problem is the long-term debt.”

According to studies conducted by the Peterson Foundation, by 2020 interest will be the largest line item in the federal budget if we don’t change course.

The Grand Bargain

A study by the Peterson Institute for International Economies found that in 2035, interest costs will account for about 13 percent of gross domestic product in advanced nations, including the U.S. That dwarfs the chunk of GDP now spent on items like research and development and infrastructure. “It has become very popular to talk about winning the future, and the investment economy,” Peterson said. ”But the melancholy question nobody wants to talk about, is where we get the resources to invest?”

The solution lies in a grand bargain that includes reductions in entitlements and spending, and increases in revenues. “I strongly believe everything must be on the table, both for fairness and political reasons,” he says.

Peterson notes that tax expenditures – items like the mortgage interest deduction and other breaks and loopholes – total up to $1.1 trillion a year. What’s more, the U.S. spends half of all the money spent on defense in the world – more than the next 14 countries combined. Peterson has little patience for ideologues on either end of the spectrum who say that long-term deficits can be closed solely by spending reductions, or solely by tax increases. “If you try to do it with spending only, the numbers are so draconian that they are really beyond anybody’s capacity to imagine,” he says.

Now that a consensus exists on the general scope of the problem, the next phase is to come up with solutions. To try to bridge the partisan divide that has prevented agreements in recent years, the Peterson Foundation has given grants to six organizations, from the Heritage Foundation on the right to the Progressive Policy Institute on the left, and asked them to come up with plans that they will discuss at a summit.

Of course, convincing former policymakers and think tanks to work on and propose solutions is less than half the battle. In the end, elected officials have to come together on a plan that will upset a lot of entrenched interested and big chunks of the electorate. What makes him believe that an agreement is within reach?

“There are two broad theories,” Peterson said. “One is that with the right level of concern and bipartisan support and presidential leadership you’ll be able to put a package together. The other is that it will take a crisis.”

While recent experience has shown that governments don’t act decisively on fiscal matters until markets force them too, Peterson is putting his mouth, and his money, on the political system’s ability to appreciate the severity of the issue on its own. “Just trust me, you don’t want a crisis on this.”

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