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Time bomb

THE BALTIMORE SUN

THE FEDERAL government's out-of-control finances are finally setting off alarms. But most Americans still seem deaf to the clanging.

Even as the recession, unrestrained federal spending and record tax cuts by the Bush administration quickly turned Clinton-era budget surpluses into big deficits, most Americans seem as blithe about the mounting disaster of this national fiscal irresponsibility as they are about the damage from their compounding consumer debts.

The sky is falling - 10 years from now? Hey, let's get through this year.

That includes President Bush, who's resurrecting plans for expanding tax-deferred savings, creating more shelters for the well-off. It also includes Democratic presidential candidates, for whom the path to a balanced budget - tax increases and spending cuts - appears an unlikely road to power.

There's nothing wrong, in war or recession, with a wealthy nation temporarily running deficits; it's a tool. But sustaining the current deficit level - almost a half-trillion dollars a year - will pile up interest costs on federal debt, drive up interest rates, dry up U.S. capital markets, compromise economic growth, and threaten foreign capital flight, a financial meltdown and global insecurity.

And still the president keeps offering tax cuts with nary a nod to the extraordinary costs for coming generations. When the administration claims it will halve the deficit through 2008 and balance it by 2011, that's by Washington accounting - by not taking into account the new Medicare drug bill, the drive to make the tax cuts permanent and other likely tax changes.

Adding those factors leads to a more realistic and far more frightening forecast: deficits growing to almost $700 billion per year by 2014 - and then accelerating as 77 million baby boomers line up for their Social Security, Medicare and federal retirement benefits.

Incredibly, the administration wants Americans to believe deficits don't matter, that the red ink will disappear because its tax cuts will spur growth and tax revenues. In a report issued last week, "Restoring Fiscal Sanity," Brookings Institution budget experts and economists - including Alice M. Rivlin, President Bill Clinton's budget director - figure the budget could be balanced in 10 years only if annual growth averages about 4 percent for the decade, an implausible boom on a scale last seen in the 1960s.

The Brookings group says the deficit dangers - including a possible Third World-style financial crisis - are not immediate, even though the dollar already has been dropping steadily. More likely is a deeper, long-term tragedy of investments not made, companies not capitalized, buildings not built, workers not hired, products not made, incomes lowered, and prices and consumer loan costs driven up. By 2014, the new study says, a fifth of all individual taxes may be devoted just to paying interest on the national debt added between 2004 and then.

Brookings isn't the only source of the alarms. Robert E. Rubin, the Clinton administration Treasury secretary, said last week that this potential "unholy mess" could trigger an economic catastrophe by eroding world confidence in U.S. markets. And the International Monetary Fund, long accused of whipping tinhorn economies on behalf of Washington, recently warned that U.S. budget and trade deficits threaten global stability.

Now for the really bad news for those who'd like to stay in denial: The Brookings study found there's simply no way to reverse course without the pain of tax increases and spending cuts. The group came to this conclusion by doing what no presidential candidate has done so far: showing how to balance the budget by 2014. It developed three scenarios: for a smaller government, a larger one and a more efficient one. And it found that even with the biggest spending cuts, new taxes would still be needed.

Not surprisingly given its Clinton ties, the group prefers the middle road, the more efficient government plan, which balances the 2014 budget with:

New taxes (returning the top four tax brackets to 2000 levels and raising Social Security earnings ceilings).

Spending cuts (defense efficiencies and eliminating some farm subsidies) and budget caps and controls.

Increasing Medicare premiums and the Social Security retirement age.

Sizable debt service savings from lowering the deficit.

The Brookings experts say they're not wedded to the particulars, only to the need for a pragmatic commitment to balancing the budget. But they're hardly optimistic.

For one reason, Americans may wrongly believe deficits just take care of themselves. After all, a growing deficit in the early 1990s became a growing surplus by the end of the decade, before the budget turned sour once more. But the Clinton surpluses evolved from tax hikes (starting under President George H. W. Bush), budget rules forcing restrained federal spending, and then an extraordinary economic burst. In other words, the Brookings group points out, growth followed certain economic policies, whereas this Bush administration now expects growth to follow precisely opposite policies.

The message: Financial discipline must be summoned to avert sapping the nation's strength. And if Washington isn't up to that, control will be taken by U.S. creditors, increasingly foreigners. Comfortable with Japan and China holding those cards?

In the presidential race, the absence of anyone fully embracing that challenge right now is understandable, but it's also just as alarming as the fiscal outlook itself. Says Charles L. Schultze, a contributor to the Brookings study who held budget and economic posts in the Lyndon B. Johnson and Jimmy Carter administrations: "The tragedy of the deficit is that it isn't a tragedy."

In part that's because this hardly is the stuff of gripping headlines. "The effects of deficits are hard to see," says Brookings economist William G. Gale. "It's hard to look at a vacant lot and say no building has been built there because there was a capital shortage - because the government was borrowing too much."

The situation calls for courageous political salesmen from both parties to help America come to grips with this tragedy in the making - with the realization that persisting deficits gradually but inexorably eat away at America's economic foundations.

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