Press Room

May 10 2012

Defusing Our Debt Bomb With A $2 Trillion Stimulus

By Senator Tom Coburn, M.D.

When Admiral Mike Mullen, former chairman of the Joint Chiefs of Staff, said our debt — not al-Qaida or China — is "our biggest national security threat," it should have been a wake-up call for every policymaker in Washington.

Yet, since Mullen made that statement in 2010 Washington has done nothing to diminish this threat.

House Budget Committee Chairman Paul Ryan, R-Wisc., deserves credit for pushing a solution when many in Washington, including some on the Republican side, want to play it safe. Unfortunately, neither the Senate nor the Obama administration has made any serious effort to propose a solution.

Majority Leader Harry Reid, D-Nev., is brazenly violating a federal law that requires the Senate to pass a budget because he doesn't want his vulnerable incumbent Democrats to cast tough votes. Meanwhile, the administration has embraced the politics of division and gimmicks like the Buffett rule while continuing to defend the failed Keynesian policies of the past.

Sooner rather than later, however, Washington will be forced to act. Maintaining the status quo is a mathematical impossibility. We are rapidly approaching the point at which we won't be able to borrow enough money to fund government's essential functions.

For instance, "Medicare as we know it" ends in five years when Medicare Part A — the hospital insurance trust fund — runs out of money. Politicians who say we can continue Medicare without structural reforms are lying and are using seniors as rhetorical human shields to stay in power.

Fortunately, Federal Reserve Chairman Ben Bernanke has been honest about the math. As he explained to Congress last year, "By definition, the unsustainable trajectories of deficits and debt that the (Congressional Budget Office) outlines cannot actually happen, because creditors would never be willing to lend to a government whose debt, relative to national income, is rising without limit."

Bernanke added, quoting a famous line from economist Herbert Stein, "If something can't go on forever, it will stop."

If current patterns hold, Washington will continue to behave as if there is no entitlement and debt crisis. We'll hear increasingly dire warnings and earnest promises to do something at the next crisis moment (i.e. the coming "fiscal cliff"), but no one will act decisively until we experience more economic pain.

Acting now rather than waiting for a meltdown would not only avert a debt crisis but would also help give us the recovery we all long for. President Obama himself has complained that American companies have $2 trillion sitting on the sidelines. There is no better way to restore confidence in our economy and get that capital flowing than for Washington to solve the problems before us.

Instead, the president and his allies are berating companies and individuals for being successful. This rhetoric moves us farther away from a solution, which is tragic because both sides understand and largely accept, at least in private, what needs to be done.

We need to reform our tax code, repair our safety net and eliminate the vast amount of wasteful and duplicative spending in the federal government, which totals nearly $350 billion every year.

Another barrier to a solution is the revival of the argument for more "stimulus" and against "austerity" in light of events in Europe. Paul Krugman, for instance, is arguing that the stimulus failed because it was too small and that we need another round of stimulus to generate a recovery. Krugman and others, however, are downplaying the negative impact of borrowing.

Economists Carmen Reinhart and Kenneth Rogoff have shown that when debt reaches 90% of GDP (we're now at 101%) we lose 1 point of GDP growth, which slows the economy by 25% to 33% and prevents the creation of 1 million jobs annually. Reinhart and Rogoff's theory is being tested in real time and has been shown to be correct.

The key question, though, is this: Why would we borrow another $800 billion and create a drag on the economy when we could create confidence and certainty through entitlement and tax reform — lowering rates and broadening the base — and release $2 trillion into the economy? A long-term debt solution would give us much more bang for the buck than another bloated stimulus.

Finally, many on the left are wrongly arguing that "cuts" means austerity and slower growth. Yet, eliminating stupid and gratuitously wasteful and duplicative federal spending is not necessarily austerity. It is common sense and, in fact, stimulative. Not all dollars are spent or wasted equally. A dollar spent in the private sector does far more to stimulate growth than a dollar spent by GSA in Las Vegas.

Sweden of all places, which had the fastest growth in Europe last year, has just shown the world that smart tax cuts and spending cuts are the best stimulus. If we want to defuse our debt bomb and get on the road to recovery that is a model we'd be wise to follow.

• Coburn, a Republican, is the junior senator from Oklahoma and author of "The Debt Bomb: A Bold Plan to Stop Washington From Bankrupting America," from which some of this article is excerpted.

Published in Investor's Business Daily, May 9, 2012