Economists mixed over U.S. budget deficit woes

by Matthew Rusling

WASHINGTON, April 28 -- U.S. Federal Reserve Chairman Ben Bernanke said Tuesday that the U.S. deficit was unsustainable, but economists were mixed over whether the deficit amounted to a manageable issue or a raging juggernaut.

"In the absence of further policy actions, the federal budget appears set to remain on an unsustainable path," Bernanke told the National Commission on Fiscal Responsibility and Reform on Tuesday.

The deficit could push up interest rates, he said, adding that an action plan was needed to curb the risks involved with too much debt.

The U.S. deficit is an issue of primary concern for many fiscal conservatives, standing at 1.4 trillion U.S. dollars last year, or nearly 10 percent of U.S. economic output, a figure that could increase this year.

But not all economists agreed with Bernanke's assessment.

Josh Bivens, economist at the Economic Policy Institute think tank, maintained there was no evidence that high deficits pushed up interest rates.

"As long as private demand for new borrowing and spending is weak, then increased public borrowing will not cause sustained upward pressure on interest rates," he wrote in a report released Monday.

Bivens contended that "policy makers most commonly cite a concern over the federal budget deficit to justify their inaction on jobs."

"Deficit hawks invoke this specter every time these rates nudge upward and routinely issue warnings about how today's low rates can turn on a dime," he said.

Writing in the Guardian Unlimited newspaper, Dean Baker, co-director of the Center for Economic and Policy Research think tank, argued that "A serious discussion of the deficit will show that in the short-term the deficit is not a problem and that the longer-term deficit is really a problem of a broken U.S. health care system."

And in his blog "Beat The Press," Baker contended that "Bernanke's statement provides no basis for determining whether this is a need to act now, in five years, or in 20 years. It effectively says nothing."

Brian Riedl, a research fellow in federal budget policy at the Heritage Foundation think tank, said that if spending trends continued, primarily in social security, Medicare and Medicaid, taxes would have to be doubled or else the next generation would inherit an immense load of debt.

"Either we are going to drown future generations in taxes or we are going to drown them in debt unless we reform spending," he said.

There are still some economists contending that while deficit spending can be risky, the administration of U.S. President Barack Obama has few other options, and that little can be done in the near term to reign in spending.

While unemployment insurance is costly, allowing the unemployed to fall through the cracks and collapse consumption will cause the economy to falter even further, some economists said.

The number of those collecting unemployment benefits in the week that ended April 10 was 484,000, according to the Department of Labor.

The Obama administration contends that the wars in Iraq and Afghanistan and other big Bush administration budget items, as well as the former administration's tax cuts, led to the deficit, as the United States boasted a budget surplus of 200 billion dollars at the start of the decade.

While many economists cite 3 percent of GDP as a benchmark of budget sustainability, others believe that is still too high. And still others contend the term "sustainable deficit" is undefined, as it depends on a number of assumptions about the economy, including health care costs and demographic changes.

Some observers said the president's concerns over the deficit -- the White House convened a special debt commission on Tuesday -- stemmed from the upcoming Congressional elections and reflected Democratic fears of losing seats to Republicans, while others argued that the administration's interest was solely in the economy.

President Obama said Tuesday he would not comment on what actions he would take to curb the federal debt until the commission concluded its report in December -- one month after November's congressional elections.

But the commission will consider every option, he said.

While Obama said he had taken steps to curb high deficit spending, it might not be enough to make up for years of heavy spending in Washington.

Appearing on Fox News on Wednesday, Rep. Dave Camp, R-Mich., who was in the room during the debt commission's meeting on Tuesday, said one primary factor driving U.S. debt was healthcare costs.

Critics said the commission amounted to political cover for a White House tax hike, as Obama had promised not to raise taxes on the middle class.

Observers said it could take some time to bring the deficit down if the administration opted to lower it with spending cuts as those took some time for Congress to execute.