How the U.S. can avoid the Greek problem

NEW YORK (CNNMoney.com) -- Call it the Case of the Missing Commission.

The bipartisan panel that President Obama has promised would tackle the nation's long-term debt problems is nowhere in sight yet.

The delay in getting the commission up and running is due in great part to partisan jockeying from both sides of the aisle and continued uncertainty about whether current Republican lawmakers will agree to take part.

There's no guarantee that when it does materialize it will have the respect of many in Congress, which would have the final word on the commission's recommendations.

And the call for the commission has taken on greater urgency in light of the recent global volatility caused by the sovereign debt crisis in Greece, which threatens all of Europe.

"You need a fiscal commission. You need it now," Simon Johnson, senior fellow at the Peterson Institute for International Economics, told lawmakers this week.

The commission will be asked to figure out ways to get annual deficits down to 3% of gross domestic product by 2015 and thereafter put the country on a more sustainable fiscal track.

The panel's timeline will be tight. The commission is supposed to issue its report soon after the mid-term elections in November so Congress can vote on them before the year is out.

So every day that goes by without a commission is valuable time wasted considering the complicated issues it is expected to address -- everything from taxes and health care to all spending in the federal budget, including Medicare and Social Security.

The commission isn't expected to make recommendations that -- if passed -- would go into effect right away. In fact, even many deficit hawks say that now is not the time for fiscal austerity. The time for that would be when the U.S. economy is on firmer footing.

But the swift establishment of the commission would help signal to international markets that the United States is working to get its deficits under control, said Johnson, a former chief economist for the International Monetary Fund.

"I think we should take events of the past few weeks in Europe as a wake-up call," Johnson said.

In the past two months, borrowing costs have soared for Greece, where the annual deficit has risen to 12% of the economy. That has forced the country to choose between defaulting on its debt or trying to convince investors of its creditworthiness by imposing stringent austerity measures such as budget cuts, tax hikes and pay freezes.

Of course, there's a lot that distinguishes the position of the United States from Greece. But the recent events show just how quickly the markets can turn on sovereign borrowers.

If the United States takes its time coming up with a deficit reduction plan, all bets are off.

"If you don't have [a fiscal commission] ... the financial markets are going to push you on the lack of medium-term credible fiscal framework," Johnson said.

And if the push for greater fiscal austerity comes during the second half of 2010, when economic growth is expected to slow, that would harm the U.S. economy.

"Raising taxes and cutting spending -- you don't want to do that in the second half of the year. If the markets force you to, that's a disaster," Johnson said.

Carmen Reinhart, director of the Center for International Economics at the University of Maryland, has studied the patterns that high-debt countries follow after severe financial crises like the kind that almost felled the U.S. economy in 2008 and 2009.

Like Johnson, Reinhart doesn't believe this year is the time for implementing austerity measures. But it is the year to come up with a plan of action to reduce the country's debt over time.

"Market discipline can come without warning. Countries that haven't laid the groundwork for adjustment come to regret it. This time is not different," Reinhart told lawmakers.

There is nothing magic or even necessary about a fiscal commission. But the fact is Congress is showing no signs of taking on sacred cows and addressing the fiscal problem head-on.

Still, having a commission and having it be successful are two very different things.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan group of leading budget experts, has warned against anyone pinning all their hopes for fiscal restraint on a commission.

"In a politically charged environment, a commission is a great idea. However, the administration must have a 'Plan B' in case the commission does not succeed."