Obama must chip away at looming monumental debt

Obama must chip away at looming monumental debt

Deficits do matter.

We didn’t believe it in 2002 when the concerns expressed by Treasury Secretary Paul O’Neill about a looming $500 billion deficit were dismissed by Vice President Dick Cheney, who told him: “You know, Paul, Reagan proved deficits don’t matter.”

And we don’t believe it today when President Barack Obama and his advisers are acting very much as if deficits don’t matter, even if none of them is careless enough to say it.

It is alarming that the deficits in President George W. Bush’s last budget, which runs through September of this year, and the one proposed by Obama for the year after that, are huge in their amounts, $1.3 trillion and $1.8 trillion respectively. But even more frightening, they reverse a trend dating from 1995, during President Bill Clinton’s second term, when the nation’s total debt as a percentage of the gross domestic product (GDP) dropped from 65 percent to about 58 percent. By 2007, annual budget deficits ranging from $100 billion to $500 billion slowly brought the national debt back to 65 percent of GDP.

Reaching for the sky

Now, it is skyrocketing, and in the $3 trillion+ that Bush and Obama will add in just two years will push the total debt to nearly 80 percent of GDP. That will be the highest percentage since the Eisenhower administration, which fell in the middle of a 35-year period during which a succession of Democratic and Republican presidents worked to get the debt down from its World War II high of nearly 120 percent of GDP.

There’s little doubt that the collapse of banks, brokerages, mortgage houses and major industries in the last year and a half has required an aggressive response. Letting major banks or auto companies fail was not an option for anyone but those willing to suffer through another great depression.

But to return to our point, deficits do matter. They add to a national debt that has already exceeded $11.3 trillion, which works out to nearly $38,000 for every man woman and child in the nation. That’s nearly double the debt 10 years ago, 10 times what it was when Ronald Reagan took office and four times what it was when he left office.

Differing rationales

In 2002, the argument that deficits don’t matter was used to justify a refusal to increase taxes, despite the changing economic demands of a nation at war in Afghanistan and on the verge of war in Iraq. Today the argument is used to justify spending aimed at keeping the economy from going into a nose dive. But intentions — good, bad or indifferent — do not matter if in the end the nation is left with annual deficits and an ever growing national debt that make it impossible for the nation to grow its way out.

The administration projects that the economy will grow at an average annual rate of 2.8 percent for the next decade, while the Congressional Budget Office estimates growth of 2.5 percent. But neither level would be sufficient to maintain the present cost of running government, which includes the increasing cost of interest on the $11.3 trillion in debt we have today. Absent a change in course, the debt could grow to nearly $20 trillion by the end of a second Obama administration.

The cold, hard fact of the matter is that there is unlikely to be a second Obama administration unless the president’s economic policies begin to bear fruit in 2010 and 2011 and unless he can chart a course that will keep the debt from heading toward $20 trillion and the highest percentage of GDP since World War II.

That’s the challenge he faces, and the one that will likely define his presidency more than any other.