Where Our Debt Came From; Where Money Could Go

This week, the president's fiscal commission meets to try and arrive at a debt-reduction plan for the nation. NPR's Scott Horsley and John Ydstie join host Liane Hansen to talk about factors that contributed to the current deficit and how it might be reduced.

LIANE HANSEN, host:

This is WEEKEND EDITION from NPR News. I'm Liane Hansen.

President Obama's fiscal commission will meet this week to try to hammer out a debt reduction plan. At least 14 of the commission's 18 members need to approve the plan before it can go forward. NPR will set up the details of the meetings in a series of stories over the next couple of days. They will explore the roots of the debt, the political challenge of reducing the red ink and what happens if Washington fails to get the country's finances under control.

NPR's John Ydstie and Scott Horsley reported the series and they're in the studio. Welcome to both of you, gentlemen.

SCOTT HORSLEY: Hi, Liane.

JOHN YDSTIE: Good to be with you.

HANSEN: John, I want to start with you. You found that the U.S. has not one debt problem but several?

YDSTIE: We do. And let's start back when we had a surplus. Back in 2000, then-President Clinton handed off an actual surplus to the new president, George W. Bush. But in the intervening decade, we had two wars that were not paid for, two tax cuts that weren't paid for, and a big prescription drug benefit that wasn't paid for. That left us with some big deficits.

Now, those deficits might have been manageable but when the financial crisis hit, we had big bailouts, President Obama's giant fiscal stimulus plan, and in the last two years we have had deficits, 1.4 trillion and $1.3 trillion and this year probably another trillion dollars.

So, there's really two separate things. One is this sort of profligacy of that decade and then the financial crisis. But the third source of our deficits is really out in the future. It's Social Security and Medicare, as the population ages. Now, they're two big programs but it's much easier to solve the Social Security problem. You can do it with some modest tax increases, modest benefit cuts, rise in the retirement age.

Medicare is a much bigger problem. And the problem there, a large part of it is just the rising cost of health care, getting that under control. And we really haven't figured out how to do that.

HANSEN: Do policymakers have to address all of these problems or will some of them maybe take care of themselves?

YDSTIE: Well, the deficits that occurred as a result of the financial crisis will largely go away. We've retrieved some money from the bailout programs. When people go back to work and the unemployed folks begin to make incomes again and begin to pay taxes again, then the deficit will stabilize.

As far as not paying for two wars and two tax cuts and a prescription drug plan, we're going to have to deal with that. There will have to be some new revenue or cuts - probably both - to take care of that.

HANSEN: Scott Horsley, the country's been running in the red for a long time now. Why has this taken on a sense of urgency now?

HORSLEY: Well, I think part of its political. There are some people for whom concerns about the debt are really just a proxy for concerns about what they see as a more activist government. But we've also come through a financial crisis that was largely caused by families and institutions borrowing more than they safely should have. And I think people have sort of internalized that and said, well, if it's not good for a homeowner to take on too big a mortgage, then it's probably not good for the government either.

And we have seen these sorts of dire situations in other countries - Greece and now Ireland. So, that's created some real concern out there in the public.

HANSEN: Do you think it's especially hard to talk about cutting spending and raising taxes when so many Americans are digging their way out of the recession?

HORSLEY: Well, it's a little bit confusing because the sorts of things that the government needs to do to address the deficit in the long term are the opposite of the things that the government needs to do to address the recession in the short run. And so it's hard to sort of get one simple bumper sticker slogan for what you want to do.

Economist have said it's certainly possible to do the things in the short run we need to do to address the recession and then make a plan for taking the steps in the longer term to address the deficit and the debt. And in fact none of the commissions that have been making these recommendations are suggesting we do something right away. The earliest medicine that they're suggesting is maybe 2012.

HANSEN: What happens if this isn't solved?

YDSTIE: Well, we've been hearing some pretty dire warnings about what could happen. At some point, the folks who are lending us money, the countries that are lending us money, might get tired of that. And they might impose some pretty Draconian conditions if they're going to continue to bail us out. Just as a creditor will sometimes impose tough conditions on a company that gets too deep in debt, we could find ourselves having to answer to the International Monetary Fund. They could say, OK, we're going to come to your rescue, United States, but you didn't get your house in order yourselves; we're going to now tell you how to do it. We're going to say you have to produce your defense budgets. You're going to have to get your entitlement programs, like Social Security, under control.

I think what these commissions are doing is saying let's try to take the actions we need to take on our own terms now rather than have them imposed on us from the outside.

HANSEN: So, what happens if they're actually able to solve the problem?

HORSLEY: Well, I hadn't thought about that. That's actually the happy ending. And we saw this sort of virtuous cycle in the 1990s when we did, for a brief period, get our budget under control. And what happens is interest rates come down, companies are able to borrow more money, the government has more money left over to make productive investments.

While there is certainly some pain and sacrifice associated with fixing this problem, there's some real benefits for the country in coming out the other side.

HANSEN: NPR's Scott Horsley and NPR's John Ydstie. Thank you both, gentlemen.

YDSTIE: You're welcome.

HORSLEY: My pleasure.

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