Budget gurus in need of fiscal Prozac

By Jeanne Sahadi, senior writer


NEW YORK (CNNMoney.com) -- Budget and tax experts are a despondent bunch these days. In fact, some have even described themselves to CNNMoney as "depressed."

Unless Eli Lilly manages to gin up a little fiscal Prozac, the only thing that will make them feel better is forward motion by Congress on the U.S. debt situation. That involves nothing less than laying the groundwork for comprehensive tax reform, budget reform, and Social Security and Medicare reform.

Oh, and it will require cooperation among Democrats and Republicans. Lawmakers will need to present a united front in explaining to the public why shared sacrifice is needed to rein in the growth of debt, which otherwise will devour the federal budget.

But experts are increasingly convinced that Congress won't act until a true crisis hits.

"[A]sking people to accept short-term pain for ... long-term gain requires broad bipartisan leadership consensus. We are 0 for 3. We don't have bipartisanship. We don't have leadership. We don't have consensus," said Norman Ornstein, a resident scholar at the American Enterprise Institute, at a conference last month held by the Peterson-Pew Commission for Budget Reform.

And waiting until a crisis forces lawmakers' hands could mean extreme economic hardship for the country. "The Great Depression is a much better analogy than the Great Recession," said tax expert Len Burman, who is writing a book on catastrophic budget failure.

Here's what he means: High levels of debt can significantly lower economic growth and create runaway inflation. That, in turn, hurts Americans' job prospects, wages, borrowing opportunities and the value of their savings and investments.

"Bottom line: catastrophic budget failure would involve hyperinflation, an eviscerated public sector, taxes that would make a Scandinavian revolt, and a crippled economy. Avoiding that fate should be your highest priority," Burman told a House Ways and Means Subcommittee on Select Revenue Measures this week.

Unlikely, but not impossible scenarios

Moody's recently put out a report that said even though the United States is not in imminent danger of losing its triple-A credit rating, the country's margin for error has "substantially diminished."

Going forward, the ratings agency said, tough choices will need to be made. "Preserving debt affordability ... will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion."

During a House Appropriations hearing last week, Treasury Secretary Timothy Geithner sought to assure a congressman that the U.S. rating would never fall.

"There's not a chance that's going to happen to this country," Geithner said. "But it is very important ... for people to recognize that ... this recovery will be weaker if we don't do a better job ... of demonstrating that we're going to have the political will to make some tough choices."

Financial markets seem to have faith in the United States for now -- judging by the low level of interest rates and the continued appetite for U.S. Treasurys.

Of course, deciding who's creditworthy and who's not among countries is a relative game. The United States, for all its fiscal issues, is still seen as a preferable place to invest than other countries, many of which are saddled with their own debt problems.

"A friend of mine likes to say, 'We're the best-looking horse in the glue factory,'" said Rudolph Penner, a former director of the Congressional Budget Office.

But looks can fade. And blithely assuming they won't is really gambling with the country's future.

It's true that a crisis may never materialize. And even if one does, no one can predict how or when. But that's exactly why there's a push now to take control of the situation while that control is still within the United States' grasp.

"[G]overnment budgets that are severely out of balance are inevitably reformed -- either by force of the markets or, preferably, by choice. Unfortunately, nations often must experience a profound crisis to focus the government's attention on taking corrective action," said Kansas City Federal Reserve Bank President Thomas Hoenig at the Peterson-Pew conference.

That's why, like Burman, Hoenig doesn't rule out the unthinkable -- like hyperinflation.

"Would anyone have believed three years ago that the Federal Reserve would have $1.25 trillion in mortgage-backed securities on its books today? Not likely. So I ask your indulgence in reminding all that the unthinkable becomes possible when the economy is under severe stress." To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Sponsors

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.