Defusing the debt bomb before it’s too late 

Judd Gregg, R-N.H., is the ranking member of the Senate Budget Committee who wants to establish a bipartisan task force to fix America’s finances.

The "Bipartisan Task Force for Responsible Fiscal Action Act of 2009," the result of two years of negotiations, made its debut last month. If it becomes law, Congress will have to vote on the 18-member commission’s recommendations to increase revenue and restrain spending. Similar legislation is pending in the House.

It’s likely to stay "pending." Though the public is increasingly concerned about the rising debt, the political class seems equally convinced that a commission is not the way to address the problem.

The left says the senators have rigged the legislation to make it impossible for the commission’s recommendations to pass; the right says it’s window-dressing that will result in minor spending cuts and major tax increases.

All of this is meaningless, however, unless the commission gains the support of 60 senators.

Democrats are hesitant to endorse a commission that would restrain or means-test entitlement spending. Of the 35 cosponsors, 20 are Republicans. Gregg says the only way to get more Democratic support would be for the president to endorse the proposal.

At this writing, the White House is more interested in a bank tax and other revenue measures than a binding commission. "Personally, I haven’t heard anything from the White House," Gregg says.

The national debt figures to be a major issue in the 2010 midterm elections. Thanks to the financial crisis, recession, and profligate spending by both Republicans and Democrats, the deficit and debt are at postwar highs. U.S. public debt is 53 percent of GDP and rising.

A new study from the Peter G. Peterson Foundation projects it will reach "85 percent of GDP by 2018; 100 percent by 2022; and 200 percent in 2038."

Besides the restrictions it places on future generations, excessive government borrowing crowds out private investment and can lead to higher interest rates. More and more of the budget goes to servicing the debt—money that buys nothing but satisfied creditors.

There is new evidence that massive debt hampers economic vitality. In a January 2010 paper, "Growth in a Time of Debt," economists Carmen M. Reinhart and Kenneth S. Rogoff find that, above a debt-to-GDP ratio of 90 percent, "median growth rates fall by one percent, and average growth falls considerably more." Consider Japan, where public debt hovers around 200 percent of GDP and the economy has been stagnant for a decade and counting.

The tools governments use to fight debt can be just as unpleasant.

Since spending cuts are politically unpalatable, officials hike taxes and thus reduce incentives for entrepreneurial risk-taking, investment and research. Another tactic is inflation, a silent tax on the middle class that punishes saving.

Take Greece, for example. The new center-left government has come to power at a time of economic crisis and political upheaval.

The deficit has spiked to almost 13 percent of GDP. Public debt is 113 percent of GDP and rising. Standard & Poor’s has downgraded the nation’s credit rating. Foreign powers are urging the government to cut expenses as a potential default looms.

The only pain-free way to lower the debt burden is economic growth; that is how America recovered from World War II, when our debt-to-GDP ratio was a record 122 percent.

No one knows when the next boom will start. And the Democratic playbook of tax, spend and regulate may delay it.

Another precedent suggests a happier ending, however. The divided government of the mid-to-late 1990s cut spending, limited tinkering with the economy, and presided over a tech boom that poured money into government coffers.

The lesson is plain. Want to defuse the debt bomb? Elect a Republican Congress.

Matthew Continetti is associate editor of The Weekly Standard (from which this article is adapted) and the author of The Persecution of Sarah Palin (Sentinel Books).

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