http://business.time.com/2013/02/13/...cit-reduction/
Does President Obama Really Believe in Deficit Reduction?
By Christopher MatthewsFeb. 13, 2013
President Obama has always at least paid lip service to the idea that the deficit and debt pose a threat to the American economy. He was in office for less than a month before he convened a “fiscal responsibility summit” at the White House — where he and Congressional leaders discussed ways to reduce the budget deficit, which was 10.1% of GDP in 2010. And in 2011, under serious pressure from Congressional Republicans who refused to raise the debt ceiling without spending cuts, the federal government enacted a series of budget cuts and limits to future spending increases, which cut the ten year budget deficit by $1.5 trillion when compared to the 2010 baseline. Last year further deficit reduction of $647 billion was achieved mostly through tax increases on those earning more than $400,000 per year ($450,000 for couples).
Furthermore, the recovering economy has done its part to reduce the deficit on top of measures taken to trim spending and raise taxes. According to a recent Congressional Budget Office Report,
the 2013 budget deficit will be 5.3% of GDP — nearly half of what it was when the President took office. The report also showed that the growth of healthcare spending continues to slow, which may be due to structural changes in the healthcare system introduced by the 2010 healthcare reform law. Both of these dynamics have combined to show the total debt remaining somewhat steady between 72.5% and 77% of GDP in the next ten years.
In other words, the budget picture has improved markedly. But how much is enough? The supposed reason the President is calling for $1.5 trillion of further reductions is because that would put the total reduction in line with what the Bowles-Simpson comission decided in 2010 was needed to stabilize the long term debt picture. But the baseline assumptions of Bowles-Simpson included the expiration of the Bush tax cuts on workers making more than $200,000, as well as draw down from war efforts – meaning that the commission called for $4 trillion in savings on top of those cost savings. So the President’s $4 trillion and Bowles-Simpson’s $4 trillion are not the same thing.
Meanwhile, many economists continue to believe that our total debt as a percentage of GDP is too high. Indeed, there is evidence that debt levels in the 70% range can slow economic growth by reducing private investment (if private companies are lending the government money, they aren’t investing it in their businesses). High debt levels may also prevent the government from effectively responding to another crisis — be it a recession or some sort of national security emergency.
But the idea that debt at 77% of GDP is dangerous while 35% or some other number is not is, for now, just a theory. There isn’t a ton of historical data to draw from, given that the international monetary system we find ourselves in is just 40 years old. After all, Japan’s government has a debt-to-GDP of well over 200% but can still borrow freely and at very low rates in the bond market.
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