Erskine Bowles, one of the most prominent US fiscal hawks, on Friday said excessive debt was an “enormous risk factor” for governments, defending the case for aggressive deficit reduction after the findings of a 2010 paper showing that high debt leads to slower growth were disputed.
Mr Bowles, co-chair of the 2010 US fiscal commission and a former Democratic White House chief of staff, made the remarks in Washington as he presented a new bipartisan plan to cut US deficits by $2.5tn over the coming decade.
He said he had read and referenced “a number of times” the 2010 report by Kenneth Rogoff and Carmen Reinhart, and also read accounts this week of the economists who questioned its findings.
“I know [Rogoff-Reinhart] had a worksheet error in the report – my understanding is that it does make a difference. But what it doesn’t change is the common sense,” said Mr Bowles. “My own personal experience – in both the public and private sector – is that when any organisation has too much debt, that is an enormous risk factor. If your risks go up, people who are lending you money will want more money for their money,” he added.
Mr Bowles and Alan Simpson, a former Republican senator from Wyoming who also co-chaired the 2010 fiscal panel, are leading the charge from the outside to push Congress and the White House into a “grand bargain” compromise on deficit reduction.
On Friday, they presented a revised plan that would bring the US debt to gross domestic product down from 73 per cent to 69 per cent in 2023. Mr Bowles and Mr Simpson said in their report that on the current fiscal path – without new congressional action – the US will hit 79 per cent of GDP in a decade, and more than 100 per cent of the economy in 2035. The Rogoff-Reinhart study said that countries with debt levels greater than 90 per cent of GDP would suffer slower growth.
“Whether 90 per cent is the right number or not, I don’t know – that’s obviously up to question,” said Mr Bowles. However, he repeated his warning that a US debt crisis – with sharply higher interest rates – could unfold at any time in the coming years unless changes were made.
The fresh Simpson-Bowles plan seeks healthcare savings worth $585bn over a decade – mainly through cuts to Medicare, the health plan for the elderly, which are deeply unpopular among Democrats. But it also sets in motion a reform process that could slash many of the big tax breaks, generating $585bn in new revenue over a decade that Republicans are deeply opposed to.
In addition, it adopts the “chained CPI” formula, a less generous measure of inflation used to calculate Social Security pension payments, which Mr Obama controversially put in his own budget this year. That would save $280bn over a decade. Meanwhile, the plan – which replaces the current automatic budget cuts under sequestration – would reduce defence spending by $220bn and that of domestic government agencies by $165bn.
Mr Bowles said their goal was to see Mr Obama and Congress converge on a plan by early August when they will need to agree to raise the US debt limit or face the possibility of default. He noted there had been some positive signs about the chances for compromise following Mr Obama’s budget proposal and his decision to step up engagement with Republicans on fiscal matters.
“We both give him a lot of credit. We’ve been pretty tough on the president but in this case we thought he took a major step forward by planting some real seeds of hope that a bipartisan deal can be done,” Mr Bowles said.
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