The Spectacle Blog

CBO Warns of Increased Risk of U.S. Fiscal Crisis

By on 7.27.10 | 5:24PM

The Congressional Budget Office today released a new report on the risk of a fiscal crisis occuring in the United States due to our long-term debt, and its conclusions largely echo points that I've been trying to make repeatedly.

The bottom line is that the longer we prolong dealing with our debt problem, the greater the risk of a fiscal crisis, and the more unattractive the options become for digging ourself out of the mess.

Some of the report undermines arguments that conservatives are trying to advance -- the CBO says, for instance, that largely extending the Bush tax cuts will significantly add to the deficit. But broadly speaking, the report presents a reality that is quite constistent with arguments conservatives have been trying to advance for years.

It outlines several consequences for growing debt, including crowding out of private investment and the need for higher taxes and/or spending cuts. Of higher taxes, however, it warns that, "To the extent that additional tax revenues were generated by increasing marginal tax rates, those rates would discourage work and saving, further reducing output and incomes."

The CBO also makes another point -- one which I constantly emphasize to conservative friends who say they're mainly interested in national security -- that a failure to address our fiscal situation will undercut military readiness.

"Having a small amount of debt outstanding gives policymakers the ability to borrow to address significant unexpected events such as recessions, financial crises, and wars," the CBO writes. "A large amount of debt could also harm national security by constraining military spending in times of crisis or limiting the ability to prepare for a crisis." It also notes that, "increased dependence on foreign investors that would accompany a rising debt could weaken the United States’ international leadership."

While the CBO notes that it's hard to predict with any degree of accuracy when or if the U.S. would encounter a fiscal crisis, it says that, "all else being equal, the higher the debt, the greater the risk of such a crisis."

Once a fiscal crisis actually occurs, the options get even worse. They include restructuring debt or causing inflation, both of which would run the risk of raising interest rates for government to brorrow money. Inflation would not only have negative economic consequences, but it would also increase future deficits. As an example: "if inflation was 1 percentage point higher over the next decade than the rate CBO has projected, budget deficits during those years would be roughly $700 billion larger."

The response to the fiscal crisis, the CBO anticipates, would likely include an austerity program with a mixture of tax increases and spending cuts. Yet those emergency measures will have to involve much more severe actions than what would be required if we were to address our debt problems now.

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