President Obama hopes to sign both additional economic stimulus plans and a comprehensive health care bill within the next two months. To get some perspective on these two critical issues, I spoke with Robert Reischauer, the director of the Congressional Budget Office between 1989 and 1995. He is currently the president of the Urban Institute and a nationally respected expert on the budget and our entitlement system. In this, the second half of our conversation about stimulating the economy, passing health care reform and solving our long term debt crisis, we go back and forth on the debt and President Obama's ability to address it. Part One -- in which Reischauer weighs in on the economic stimulus and health care debates -- is here.
The average American does not accept that we have to address this problem, and that in addressing it we're going to have to affect programs and taxes that that average American cares about. We're at at stage where people can say mañana: "I accept that we have a terrible debt problem but there is no pressing need to tighten our belt in the immediate future."
I hoped Obama would have put in this year's budget some kind of statement saying "I won't enact a stimulus bill unless there is some legislation that will begin to trim spending and raise taxes starting in 2013."
Politically there are obvious risks with this kind of plan, but what about economically: Would you be worried about a Ricardian equivalence effect, where Americans don't spent the stimulus money today because they're afraid that their taxes are scheduled to dramatically increase within the next three years?
But what do you think happens in three years if we keep running the deficit? A collapse of the dollar? Increase in interest rates? Remember back in 1993, we had a weak economy and people were arguing that we should raise taxes and cut spending and the Clinton administration did and the impact of that was to provide confidence in markets.
There are some economists who argue there is no debt problem. They say look what happened after World War II. Public debt was well over 100 percent of GDP, more than twice the current levels. But in 1946 the deficit declined without a catastrophic recession, because the public debt in the hands of the public was the engine of the late-40s and 50s boom. Savings bonds that provided us with purchasing power and all those interest funds spent back in the US was an enormous fiscal stimulus. But today the CBO is projecting enormous interest payments over the next few years and also slow economic growth. Are they misreading something?
The difference back then was that we owned our own debt. Today half of it is owned by foreigners. That's a very different situation. At that point, the US was the only industrial power left standing and the rest of the world was in ruins and the demand for goods and services produced in America was huge. People because of the depression and the rationing during the war had huge pent up demand for goods and services that they hadn't bought in years. It was a very very different time.
Still there are plenty of respected thinkers like Paul Krugman who consistently say it's damaging to warn about a debt crisis today, since interest rates are exceedingly low and the economy still needs government assistance to replace weak private demand. Is it dangerous to talk about the debt today?
I wouldn't worry about real action over the next two to three years. But the question is: When should we worry? When the economy recovers, we'll say there's no reason to worry with employment high and corporate profits high. We're reducing our ability to respond to crisis in the future. We've mortgaged ourselves to countries that do not share our values or our geopolitical aims. Do you want to have to think twice before setting up a meeting between the president and Dalai Lama, or sell arms to Taiwan and South Korea?