We recently were able to hear David Gergen, a Washington insider, speak at the NAPFA conference in Salt Lake City this month. Among other thoughts about the US debt crisis, he commented on the political workings of the issue.
Gergen told the audience that, despite all the bickering, both sides of the aisle see the current debt crisis through the same basic filter. “People in Washington basically agree on the nature of the problem and its consequences,” he said. “which are outlined in the theories proposed by economists Ken Rogoff and Carmen Reinhart.”
Rogoff and Reinhart’s influential book, entitled “This Time It’s Different,” looks at various debt, fiscal and economic crises in different countries around the world over a period of several hundred years. Their conclusion is that the most crippling economic scenarios play out over a familiar pattern. First, you have a financial crisis, and the government throws a ton of money to end it. This, in turn, causes a fiscal crisis. “And it is how they handle the fiscal crisis that determines their long-term well-being as a country,” said Gergan.
The book also outlines some danger zones. If public debt grows larger than 60% of the size of the country’s economy, you start to enter a danger zone. If the debt level reaches 100% of GDP, the country moves into the danger zone. Gergen noted that since World War II, U.S. government debt has generally run about 38% of America’s Gross Domestic Product–what Rogoff and Reinhardt would call a healthy range. This last year, we reached the 60% level. Under the government’s current trajectory, we might hit that 100% level in less than a decade.
Both Republicans and Democrats want to avoid that scenario, which is the good news. The bad news is that they disagree on how to do it. Is there any hope? Gergen noted that several bipartisan groups are attempting to map out solutions but can they agree and can they agree in time?
Overhanging any negotiations, and making them more complicated, is the debt ceiling limit, which will be breached on August 2, throwing the U.S. in technical default on all of its bond obligations. “[U.S. Treasury Secretary Tim] Geithner would like to get this resolved well before August 2, so as not to rattle the markets,” Gergen told the audience. “The Wall Street folks are warning the people in Washington not to play with the debt ceiling, that any loss of confidence in the U.S. could be a big deal. Meanwhile, the Republican leadership thinks they’ll get a better deal as they approach August 2, and some Republicans think there may not be a problem if the negotiations go past August 2.”
In the long run, Gergen said, if Congress manages to address the debt issue responsibly, it could make America stronger. “Otherwise,” he said, “it will be very bad news.” Because the political risks of taking action that might alienate the public, both Congress and the White House seem to prefer kicking the government debt issue down the road for 18 months, deferring any serious action until after the 2012 elections, which Gergen finds dismaying.
“We’re playing right close to the edge on this,” he told the group. “This is dangerous stuff for our politicians to be playing with.” He described it as one of the most serious issues he has seen in Washington in the last 30-40 years.