For most of the past decade, the United States has been living beyond its means, borrowing money frantically to compensate for tax cuts and pay for unfunded wars, new entitlements, bank bailouts, you name it. The breakdown in fiscal discipline is evident in the numbers.
In its last act of 2009, Congress voted to raise the federal debt ceiling to a once unimaginable level of $12.4 trillion to avoid a government default. But since lawmakers increased the maximum amount of borrowing by "only" $290 billion, the system will soon need another fix to feed a voracious borrowing habit.
In financial terms, fiscal year 2009 was a horror. The $1.4 trillion budget shortfall was equal to 10 percent of the economy, the worst showing since World War II. Much of it was due to the bailouts under former President Bush and President Obama and the $787 billion stimulus package, which kept the economy from sliding into another Great Depression.
This budget gap capped a near-decade of runaway deficits. Today, the country is shoulder-deep in red ink, with a tidal wave approaching. Federal debt equals 53 percent of the Gross Domestic Product, way above the 37 percent average of the past half-century. The government pays $200 billion in interest each year.
And the increase in debt is accelerating. The deficit roughly doubled from about $6 trillion in 2002 to $12 trillion. At this rate, the national debt is on track to hit 85 percent of GDP by 2018.
As a result, barring strong action by Congress and President Obama to restore fiscal sanity, profound and harmful long-term consequences are inevitable.
A devalued dollar, higher interest rates, greater spending to service the debt, and depressed wages will produce a diminished standard of living and reduced standing on the world stage. Already the nation is in hock to China to the tune of $800 billion. We owe Japan almost as much. A nation so deeply in debt to others cannot compete politically or economically with its own creditors.
Can we get out of this mess? Yes, but it won't be easy. The era of deficit spending followed four consecutive years of federal budget surpluses around the turn of the century. What changed was a national mentality that scoffed at the notion of fiscal discipline and refused to make hard choices. When former Treasury Secretary Paul O'Neill advised against another round of tax cuts at a Cabinet meeting in 2002, then-Vice President Dick Cheney reportedly replied, "Deficits don't matter." O'Neill soon left government and the deficits piled up.
They matter now. Obama has promised to cut the deficit in half by 2014, but promises aren't enough. Recently, the Peterson-Pew Commission on Budget Reform recommended that the government make an enforceable pledge to stabilize federal debt at no more than 60 percent of GNP by 2018. That's at least a start.
There are other targets and disciplinary measures the government can embrace. Congress can re-impose the pay-as-you-go rule requiring all new spending to be paid for with new revenue. Economists generally agree deficits should not exceed 3 percent of GDP - a rule the federal government can also adopt.
Ideally, Congress should be able to discipline itself. History suggests it can't.
That's why some deficit-conscious lawmakers want to create a bipartisan task force to find ways to overcome the budget crisis. That's a good idea, but Congress must commit itself to heeding the recommendations. Another strong proposal would create a similar commission on "entitlement reform" - i.e., stopping the runaway growth in Social Security and Medicare.
None of this will be painless. Only by spending less and getting more revenue can the government avoid new rounds of crushing debt. New taxes could hobble the economic recovery, but the government has to find ways to balance its books. It must look for savings in programs. A war surtax is worth considering, too.
Perhaps a small increase in the federal gasoline tax, which could bring in tens of billions of dollars, is warranted. A broad consumption tax, eliminating exemptions in the income tax (and cutting rates), a carbon tax - all of these are measures that may be necessary in order to get out of a very big hole.
Some ideas have more merit than others. As the year goes on, we will be examining fiscal-rescue plans and the proposals that President Obama has promised to offer in greater depth. What is beyond question at this point is that we cannot hope to regain our economic strength unless the federal government puts its own fiscal house in order.