How to cut the deficit — and what happens if we don’t

By Mark Zandi,
WashPost
Published: July 15

The Obama administration and Congress must raise the federal debt ceiling by Aug 2. That is all there is to it. In a post-default world, financial markets would unravel and the U.S. and global economy would enter another severe recession. The nation’s already daunting fiscal problems would spiral out of control as tax revenue plunged and demand surged for unemployment insurance, food stamps, Medicaid and other programs supporting vulnerable Americans.

Yes, it would be wonderful if politicians could agree to rein in future budget deficits as part of a debt-limit deal. But that isn’t necessary right now. Simply raising the debt ceiling enough to last through next year’s elections would appease global investors and sustain the economic recovery. The 2012 vote will be a referendum on how to address our fiscal problems: The winner sets the agenda, and tough decisions can be made after the swearing-in of the president and Congress.

It is laudable that lawmakers have attempted to do more now, hoping that the pressure surrounding the debt ceiling would force big changes in fiscal policy. And it is encouraging that they are coalescing around the same budget math: President Obama has called for about $4 trillion in deficit reduction over the next decade; so did Republican Rep. Paul Ryan (Wis.), chairman of the House Budget Committee, in his budget proposal; and so did the Simpson-Bowles fiscal commission. About $4 trillion over 10 years is the amount of deficit reduction needed to make the government’s fiscal situation sustainable, keep interest rates low and strengthen our economy in the long run.

There are significant disagreements over the composition of the deficit reduction, but these can be overcome if we agree to achieve the entire $4 trillion reduction through cuts in government spending — and that includes tax expenditures.

(More here.)