The National Debt Clock in New York, which shows the U.S. national debt.SHANNON STAPLETON/Reuters
You can almost see it.
An emissary from the White House is meeting with Democratic lawmakers, urging them to get behind the small adjustment to entitlement programs that President Barack Obama has endorsed to win a broader budget agreement with House Republicans.
That emissary from the White House is met with this: Bugger off, Paul Krugman says the problem is solved.
Prof. Krugman, the Princeton University economist and lodestar of the U.S. political left, says the deficit "scolds" are exaggerating the threat posed by four consecutive $1-trillion (U.S.) budget deficits and a debt that is projected to surpass 100 per cent of gross domestic product.
In his latest New York Times column, Prof. Krugman takes it up a notch. "The budget deficit isn't our biggest problem, not by a long shot," he writes. "Furthermore, it's a problem that is already, to a large degree, solved."
That's not as crazy as it sounds. Calmer heads around Washington will tell you that the "fiscal cliff" agreement hasn't received the credit it deserves.
The $600-billion in tax increases agreed on Jan. 1 add to $1.7-billion in deficit reduction measures enacted as part of the 2011 debt-ceiling deal. (Both sums are spread over 10 years.) The Center on Budget and Policy Priorities estimates that additional savings – spending cuts and/or tax increases – of $1.4-trillion would stabilize the growth of the debt. Congress and the White House already are committed to an additional $1-trillion in spending cuts – the so-called sequester of across-the-board reductions that currently are set to begin in March.
President Barack Obama and House Speaker John Boehner both agree that additional revenue could be raised by closing loopholes and curbing deductions in the tax code. Mr. Obama also has said that he is open to slight adjustments to entitlement programs such as Social Security and Medicare that would curb benefits. A short- to medium-term fix of the U.S.'s budget issues is well within reach.
Of course, Republicans want to do more than just stabilize the debt – they want to cut it.
The Treasury's borrowing authority reached its $16.4-trillion (U.S.) limit on Dec. 31 and Secretary Timothy Geithner says he will run out of accounting manoeuvres to pay the bills as early as mid-February.
House Republicans, who control the purse strings, are determined to use the extension of the debt limit as leverage to win spending cuts. They announced Friday that they would hold a vote next week on raising the debt ceiling for a few months to give Congress more time to work out a budget agreement. But the Democratic-controlled Senate would have to agree to pass a budget by April 15 or lawmakers would forfeit their paycheques. "We are going to pursue strategies that will obligate the Senate to finally join the House in confronting the government's spending problem," Mr. Boehner said. "The principle is simple: no budget, no pay."
Budget projections suggest that any stabilization of the debt would be temporary. After a decade, spending would begin to expand as an aging population puts ever more pressure on Social Security and Medicare, the health program for seniors.
Still, most Democratic lawmakers are less than keen to address the problem. From his pedestal at the Times, Prof. Krugman, a Nobel laureate, is crying for them to hold their nerve: "So the plan is to avoid cuts in future benefits by committing right now to … cuts in future benefits. Huh?"
For Prof. Krugman, the U.S. isn't facing a budget crisis, it is facing a jobs crisis. He accepts that Social Security and Medicare could one day reach a breaking point – and if that day comes, it will be up to a future group of lawmakers to sort it out.
And maybe ultimately that's what it will take to get the elusive "grand bargain" to fix the U.S. budget deficit. It took the national embarrassment of being compared to Mexico, a struggling emerging market, for Canada's political class to embrace dramatic deficit reduction in the 1990s. However, there is no such broad acceptance of the need for deep spending cuts in the United States. That means the country is poised to lurch from one short-term "crisis" to another for some time to come.