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The U.S. Budget Deficit Remains a Huge Problem

Article by Robert E. Litan May 3, 2012 //   3 minute read

It’s not just on Wall Street and in some Congressional offices that one hears alarmist talk about the trillion-dollar plus federal budget deficits. It clearly has been one of the main themes stressed in numerous panels — ostensibly on different topics — here at the Milken Institute’s annual global conference in Los Angeles. The consensus seems to be that Congress has a narrow window in 2013, after the election, to do something about the problem — going well beyond the August 2011 budget deal that is supposed to yield $1.5 trillion in budget savings over 10 years (or a 10-year $1.2 trillion sequestration beginning January 1 if the $1.5 trillion has not been legislated before the end of this calendar year). The logical place to begin is with the Simpson-Bowles plan, or something close to it. This will be issue number one on the domestic policy agenda regardless of the outcome of the Presidential election. At some point, the bond market vigilantes will mount an attack on U.S. Treasuries if no major long-run budget deal is arranged. U.S. policy makers will be playing Russian Roulette with the financial health of our economy, and that of the rest of the world, if they fail to act. One final word: If a budget deal is made, fiscal policy will be taken off the table as a tool of counter-cyclical monetary policy for a very long time. This means it will fall to the Fed to maintain low short-term interest rates to keep the expansion going, absent a pickup inflation, so that we can bring down our intolerably high unemployment rate. Indeed, a budget deal by itself also would help keep long-term interest rates at their record lows, which among other things would help heal the housing market. This is yet another reason it is in the national interest for our political leaders to finally address the long-term budget imbalance.