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Deficits Must Be Curbed or It's Disaster For Economy: Study

A bipartisan group of former lawmakers and budget officials called on Congress and President Barack Obama Monday to commit to reining in trillion-dollar plus budget deficits to avoid dragging down the economy.

US Capitol Building with cash
US Capitol Building with cash

Policymakers must take steps next year to enact policies to stabilize the debt at 60 percent of the size of the economy to avoid higher interest rates or crisis in global markets with disastrous implications for the U.S. economy, according to a report by the Peterson-Pew Commission on Budget Reform, a bipartisan group of deficit hawks.

The bipartisan group includes former lawmakers and directors of both the Congressional Budget Office and the White House budget office.

"A hard landing — where higher deficits and debt cause investors to lose confidence in the U.S. economy and rising interest rates choke off the economic growth — is a real possibility," said the group's report.

Economist Douglas Holtz-Eakin, a former director of the Congressional Budget Office and adviser to 2008 GOP nominee Sen. John McCain of Arizona, warned that global markets could eventually lose confidence in the U.S. government's capacity to bear its rapidly growing debt. Such a sharp reaction could lead to a decline in the value of the dollar, higher interest rates and a resulting recession.

But even members of the commission expressed little confidence that Congress and the Obama administration could summon the political courage to approve tax hikes and spending cuts next year to ease the chances of a debt-related crisis. Republican lawmakers are fervently against tax increases while Democrats have demonstrated little desire to curb benefit programs.

Instead, it may take a crisis to jolt Congress into action.

"The most likely action-forcing event would be a substantial spike in domestic interest rates," said retired Rep. Bill Gradison, R-Ohio.

The Pew-Peterson group doesn't recommend specific tax cuts or spending cuts to accomplish the goal of stabilizing the debt, which is presently about 60 percent of gross domestic product. Given the frail economic recovery, the panel says new debt-reducing policies shouldn't take effect until 2012.

But in producing an illustrative way to achieve its goal — relying over the next decade on almost $2 trillion in tax increases and cuts to Social Security benefits, farm subsidies and Medicare — the panel shows just how challenging the task would be.

While deficit hawks have long warned that policymakers need to curb deficits and debt, the new wrinkle is that the U.S. budget deficit picture has worsened so much — largely because tax revenues have fallen off so sharply — that the government is likely to reach a crisis point much sooner than under past forecasts.

"What was once a three-decade problem is now a one-decade problem," Holtz-Eakin said.

Several panel members said that the health care reform bill before Congress will only make it more difficult to address deficits and debt, in large part because tax increases and Medicare spending cuts in the bill will make it harder to use tax increases and Medicare spending cuts for deficit reduction.