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Cutting deficit will mean hard decisions that can't be put off

The chairmen of President Obama's debt-reduction commission have put forth their ideas, but they aren't the only possibilities.

The chairmen of President Obama's Commission on Reducing the National Debt outlined a provocative set of draft proposals recently. Their proposals will be considered by the full bipartisan commission, which is to issue its final plan on Dec. 1.

The proposals are timely. Concern about the size of the federal deficit was a major issue in the recent mid-term elections. Politicians on both sides of the aisle are foursquare for reducing America's "massive deficit" – that is, until asked to be specific about what they actually would propose.

Thus, Obama's decision to resort to a national commission. The hope is that the commission chairmen, Alan Simpson, a former Republican Senate leader, and Erskine Bowles, White House chief of staff under President Bill Clinton, can persuade 14 of the 18 members to endorse a set of proposals that could achieve the president's target of reducing the deficit to less than 3 percent of the gross domestic product by 2020.

Today's deficit is almost 9 percent of GDP. The endorsement of at least 14 members would trigger votes on the proposals in both the House and the Senate. This is serious business. However, much of the current debate is misleading. Let me clarify a few things.

First, in spite of all the rhetoric, we do not have an immediate deficit problem. The current deficit is high by historic standards, but it largely reflects the impact of the severe recession of 2009 and subsequent economic stimulus spending. Most economists agree that the stimulus has been good and necessary policy action. Even Warren Buffett had an open letter of thanks to Uncle Sam in last week's New York Times for the actions taken during and after the crisis.

Second, the real deficit problem kicks in about 2015 and thereafter. This is the time when post-World War II baby-boomers retire in large numbers, driving up the costs of entitlement programs such as Medicare and Social Security to what appear to be unsustainable levels. If current trends go unchecked, the federal deficit by 2030 could be as high as 12 percent of GDP.

Third, why should we be concerned? We should be concerned because at some point in this post-2015 future the U.S. debt markets will collapse. Countries like China and Japan will refuse to buy our debt unless we provide much higher interest rates than today. The most likely scenario is that U.S. credit markets would implode, creating a global crisis more dangerous than the one in 2009. And remember, in 2009 we were only days away from ATMs ceasing to provide cash – chew on that one for a moment or two.

The problem with this crisis scenario is that global markets are unpredictable. No one is quite sure how much debt it would take to trigger a global crash.

What economists do know is that if we don't come up with ways to get his post-2015 deficit condition under control – that is, from 12 percent of GDP to something closer to 3 percent – we are in dangerous and uncharted waters.

All of this suggests we do need to be paying attention to the proposals put forth by the debt commission chairmen. They are strong medicine, including $100 billion in spending cuts in defense, raising the Social Security retirement age to 69, repealing many popular tax deductions, including those on mortgage loan interest, significantly greater reductions in Medicare spending growth, and over $400 billion in further discretionary budget cuts – to highlight a few of their proposals. About 75 percent of the reductions would come from spending cuts and 25 percent from tax increases.

Early reaction has been predictable. Leading Democrats viewed the magnitude of the cuts in social spending as a non-starter. Republicans have been more muted in their criticism, but their leaders have consistently opposed tax increases and any significant cuts in the defense budget.

It is OK to disagree with these proposals. However, we must ask our leaders to propose responsible alternatives. All Americans should be able to agree that reducing the deficit to approximately 3 percent of GDP in the 2020 to 2030 timeframe is the goal. If you don't like one or another of these proposals, then come forward with your own plan to achieve the goal.

Let us move this debate from complaining about spending cuts to one of finding a common solution. We must make it clear to our political leaders that we expect no less of them.