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U.S. Hovers Close To Its Debt Ceiling

Treasury boss says government business could be affected

TOM ABATE San Francisco Chronicle 8jan2006

 

If consumers are overextended with credit, they're not alone. The U.S. government is poised to exceed its charge card limit and may have to quit paying its bills unless Congress raises the national debt limit soon.

That's what Treasury Secretary John Snow said in a recent letter to Congress, warning that unless the current $8.2 trillion debt ceiling is raised by mid-March, "we will be unable to continue to finance government operations."

In the last 50 years, the United States has raised its debt ceiling more than 70 times, and budget watchers say lawmakers have become expert at delaying or disguising this politically perilous task.

"The antics they go through are incredible, and they've gotten worse,'' said Maya MacGuineas, president of the nonpartisan Committee for a Responsible Federal Budget in Washington, D.C.

For instance, in his Dec. 29 letter, Snow said that while the debt limit "will be reached in mid-February 2006," he could delay default for a month using "available prudent and legal actions."

These actions, MacGuineas said, would include putting IOUs instead of cash into federal retirement accounts -- a tactic that Clinton administration Treasury Secretary Robert Rubin first employed in 1996, when Republican lawmakers balked at raising a debt ceiling then at $4.9 trillion.

Back then, some lawmakers in the Republican-controlled House of Representatives called for Rubin's impeachment, saying his action usurped the powers of Congress. But in 2002, when the Bush administration was about to hit the $5.95 trillion debt limit it inherited from President Bill Clinton, then-Treasury Secretary Paul O'Neill employed Rubin's tactic to buy time until Congress raised the debt ceiling to $6.4 trillion in June.

Alas, that limit lasted just 11 months. In May 2003, Congress authorized borrowing of $7.4 trillion. In November 2004, lawmakers upped the credit ante to $8.184 trillion. Now, Snow says the limit must be raised yet again to protect "the 'full faith and credit' of the United States."

Late last year, the Republican-controlled House of Representatives wrote a $781 billion increase in the debt ceiling into its budget. The Senate, also controlled by Republicans, has yet to act.

The federal debt is so mind-boggling it's no wonder lawmakers would rather not think about it. In per capita terms, the current debt is about $27,000 for each of 298 million Americans.

But economists tend to look at the national debt as a percentage of the gross domestic product -- the sum total of all goods and services. This links the debt level to the nation's ability to pay and factors out inflation over time.

By this measure, the national debt has ebbed and flowed with world and political currents. According to historical tables in the 2006 federal budget, debt peaked at 121.7 percent of GDP in 1946 because of World War II spending. It fell to about 33 percent of GDP in 1980, then roughly doubled to the 60 percent range during the administrations of President Ronald Reagan and the first President George Bush.

After hitting 67.3 percent of GDP in 1996, a few rare budget surpluses during the Clinton era drove the national debt back down to about 57 percent in 2001.

Debt as a percentage of GDP turned up again as the Bush administration began running deficits and now stands at an estimated 65.7 percent of GDP. The 2006 budget forecast predicts that the national debt will be 70 percent of GDP in 2010.

Nonpartisan budget watchers say the current debt load isn't the problem. They worry about what happens after 2010, when retiring Baby Boomers begin placing demands on Social Security and Medicare.

"It's not where we are. It's the trajectory we're on,'' said Douglas Holtz-Eakin, who just stepped down as head of the Congressional Budget Office, the nonpartisan research arm of Congress.

As his last official act, Holtz-Eakin sent Congress six scenarios that look at federal spending and debt through 2050. All six assume that Social Security benefits will be paid as required by current law. The differences lie in how much inflation occurs in Medicare and Medicaid; higher or lower levels of taxation; and whether, or how deeply, Congress curbs spending on defense and other programs.

The scenario that follows current trends leads to an eye-popping national debt of 449 percent of GDP in 2050. Seen another way, in this business-as-usual scenario, it would cost 21.4 percent of GDP to pay just the interest on the federal debt in 2050. In 2005, the comparable figure was 1.5 percent.

Other scenarios make what Holtz-Eakin calls the "miraculous" assumption that medical cost inflation will fall below current levels, or count on politically tough choices to raise taxes or cut many spending programs.

"There is no single lever one can pull to bring the spending level into balance,'' he said.

Brookings Institution economist Alice Rivlin was founding director of the Congressional Budget Office in 1975 and was vice chair of the Federal Reserve Board in the late 1990s. She agreed with Holtz-Eakin that the current debt load isn't really the problem.

"The scary part is that there doesn't seem to be any prospects for getting the deficit under control,'' Rivlin said, adding that in this light, "raising the debt ceiling is a sort of red flag that says, 'You've got a real problem here.' "

But political leaders have become adept at keeping that red flag from attracting too much attention. When Snow wrote Congress before the new year, there were few on Capitol Hill to read his letter or the retort by Rep. James Spratt, D-S.C., the ranking Democrat on the House Budget Committee, who blamed the Republican-run White House and Congress for "a 50 percent increase in the statutory debt, all accumulated on the Bush administration's watch."

Budget watcher MacGuineas said the ceiling must be raised. To do otherwise would cause a financial crisis. But it will be done as quietly as possible, to avoid discussion of the tough choices that must ultimately be made.

"What bothers me most is the generational aspect," she said. "We are leaving an economy with huge debt, huge promises. And it's only going to get worse."

source: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/01/08/BUG7IGJHEI1.DTL&type=printable 8jan2006

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