Budget gurus in need of fiscal Prozac

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.

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."