Stories about the national debt are all over the news this week. The combination of a monstrous global recession and nearly a decade of tax cuts for the wealthy have combined to put the federal government into a significant and relatively daunting fiscal hole. Like so many of the other problems he inherited, this predicament has placed President Obama in a tough spot.

On the one hand, he knows that continued economic recovery depends on a continued commitment to robust federal stimulus policies. Shut off the spigot too soon and the turnaround that last year's Recovery Act legislation helped to spur will surely wilt and wither. On the other hand, he also understands that current federal deficits are not sustainable – at least in the long run. Something more than just hunkering down and hoping for a miraculous recovery will need to be done before too long.

Yesterday, in yet another effort to find common ground with conservatives, the President appointed a former Republican senator from Wyoming, Alan Simpson, and every Republican's favorite Democrat (North Carolina's own Erskine Bowles) to head a new "National Commission on Fiscal Responsibility and Reform." The goal of this group appears to be to take yet another stab at brokering some kind of a debt reduction deal – that is, to somehow win some conservative support for a compromise solution that addresses the issue without sending the economy back into a tailspin of the kind it was experiencing at the end of the Bush presidency.

Achieving such a bipartisan deal will likely be a tough nut to crack. In the ever-more cynical, hardball world of modern Washington, conservative ideologues smell blood in the water with the debt issue and seem determined to do whatever they can to use it to their political advantage – regardless of the real world impact on the country.

Indeed, in many ways, the debt issue presents exactly the kind of opportunity for which extremist ideologues like Rush Limbaugh and Grover Norquist have long yearned – the opportunity to use obstructionist, "just say no to everything" politics in order to create chaos and help bring about grave crises in the health of essential public institutions. It's from the same playbook that conservative ideologues are using right now in Wake County as they do their best (worst?) to tear down the County's public school system in hopes of replacing it with quasi-private, fee-for-service model of education. Remember the Bush proposals to privatize Social Security?

A little perspective

Fortunately, despite the real world and political challenges posed by the debt problem, the truth of the matter is that it is not an immediate "crisis" of the proportions that some current media reports portray.

Yesterday, nationally acclaimed economist Dean Baker of the Center for Economic Policy Research released a special report on the debt issue entitled "The Budget Deficit Scare Story and the Great Recession." In it, Baker – one of the earliest identifiers of the "housing bubble" that precipitated the current crisis – expounds on the true size of the federal government's current deficits and the prospects for a return to relative solvency.

Here is his thumbnail summary:

"1) The extraordinary level of current deficits is overwhelmingly the result of the economic crisis. If any part of the system is ‘broken,' as claimed by some deficit hawks, it is the structure of economic policymaking that allowed for an $8 trillion housing bubble to grow unchecked. It was inevitable that this bubble would eventually burst, leading to the sort of economic crisis that the country is now experiencing. This crisis was both foreseeable and preventable. There is little reality to the claim that [the current] Congress is out of control in its tax and spending policies.

2) The budget deficit does not pose an economic problem at present. If the budget deficit were smaller, we would simply be seeing higher unemployment. There would be no short-term or long-term benefit from reducing the current deficit.

3) The size of the longer-term deficit problem has been both exaggerated and misrepresented. Projections show that debt-to-GDP ratios will be well within manageable levels at least a decade into the future, even if there are no major changes from baseline scenarios. As a long-term issue, the United States must fix its health care system. This, not demographics, is the real long-term deficit problem, as can be easily shown.

4) The wealth of near-retirees has been devastated by the collapse of the housing bubble and the plunge in the stock market. The economic prospects for these age cohorts look bleak even assuming currently scheduled benefits from Social Security and Medicare. Any substantial reduction in these benefits will likely leave large segments of middle-income workers with near-poverty level incomes in retirement.

5) Concerns about foreign ownership of the government debt are offensive jingoism. There is an issue about foreign indebtedness because this implies that an increased portion of future output will be paid out as interest and/or dividends to foreigners rather than being available for domestic consumption. However, this is driven by the trade deficit, not the budget deficit. The trade deficit, in turn, is attributable to the over-valuation of the dollar. The deficit hawks have rarely focused on the value of the dollar, preferring instead to hype misleading concerns about foreign (especially Chinese) ownership of government debt."

In other words…

While the deficit and debt problems are real and worth devoting significant attention to, they should not rise to the level to which some would elevate them. The issue is not something that's worth tearing down the federal government and/or ending aggressive recovery action over.

As Baker notes, the federal deficit is currently projected to run at a rate of less than 2.5% of Gross Domestic Product for the next decade – even if we do essentially nothing to address the issue. While significant and above desirable levels, this is well-below historic highs (such as at the close of World War II).

Moreover most of these deficits are attributable to the economic downturn – not to the spending hikes and tax cuts enacted as part of the Obama recovery package. If any spending growth is really to blame, it is the massive outlays for the wars in Iraq and Afghanistan. If the lawmakers in Washington were to all of a sudden do an about face and reverse course on stimulus spending they would only make matters worse. This may be what Norquist and Limbaugh have in mind, but it would be terrible for the country.

"But what about those dire projections for the decades to follow?" you ask. "Mustn't we act now to avoid truly catastrophic deficits and debt in 2020 and beyond?"

To this Baker offers the following retort:

"Many analysts have highlighted the longer-term fiscal deficit picture, which is indeed bleak. However, these disastrous deficit projections are driven almost entirely by the assumption that per person costs of the U.S. health care system continue to get ever further out of line with costs in other wealthy countries….This suggests the urgency of fixing the U.S. health care system."

This view coincides with the recommendations of experts at the Center on Budget and Policy Priorities who noted in a report last month that:

"Rising health care costs are the single largest cause of rapidly rising expenditures, and ongoing reform of the health care system is absolutely fundamental to any solution."

Going forward

Despite the carping of right-wing ideologues and political opportunists, President Obama deserves a good deal of credit for the consistent seriousness with which he has tackled the issues of recovery and federal debt. Let's hope that Erskine Bowles follows the advice of experts like Dean Baker and helps lead the new debt commission in a similar direction – that is, away from panicky and irresponsible cuts that would harm average Americans and toward common sense solutions like real, long-term health care reform that will serve the country well for the decades to come.