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Treasury Secretary Timothy Geithner
Following are some remarks from Treasury Secretary Timothy Geithner’s address to the Harvard Club of New York City on May 17, 2011. Geithner talks about the debt ceiling and the fiscal crisis we face if we don’t get control of our deficits. The debt ceiling of $14.294 trillion was technically breached last week, though the new deadline for extending it is Aug. 2 owing to games Treasury can play in shuffling money around various accounts it controls.
I want to talk today about the question of how we deal with our fiscal challenges….
I chose this subject not because it is the only challenge that we face in economic policy. With unemployment still around 9 percent and millions of Americans at risk of losing their homes, seeing the value of their savings eroded, and feeling uncertain about their future economic security, we face formidable economic challenges. But our ability to deal with all those challenges will now be determined by our ability to restore long-run fiscal sustainability.
We spent the last decade piling on debt to pay for expensive tax cuts, a large prescription drug benefit, and two wars.
On top of this legacy of choices, we had to clean up the worst financial crisis since the Great Depression.
And we face unsustainable future fiscal deficits, caused, in part, by the dramatic rise in the number of Americans who will turn 65 in the next decade, combined with the fact that we now live longer and will spend more on health care.
Now we have to find a way to return to living within our means.
But our fiscal problems are so pressing that they threaten to undermine the foundations of our future economic strength, our ability to protect our national security interests, and our capacity to sustain the commitments made by 13 presidents over 75 years to provide economic security to the poor and the elderly.
We now borrow 40 cents for every dollar we spend, and under current policies, our total federal debt burden will be almost as large as the entire American economy within the next decade.
We do not have the option of leaving this problem to another day, another Congress, another President.
It is true that we are now able to fund these deficits at very low interest rates, less than 3.5 percent now for a 10-year Treasury bond. But these rates are a reflection of confidence that we will act, not a justification for inaction. And they are unusually low now also because of the relative lack of other investment alternatives in a world still recovering from crisis and with the other major economies facing comparatively tougher problems than even ours here in the United States.
There is no way of knowing how long financial markets will give the American political system to get ahead of this problem. But it makes no sense for us to wait until they force action upon us.
As we saw in the fall of 2008, when confidence turns, it can turn with brutal force and with a momentum that is very difficult and costly to arrest. This is a threat we should pre-empt. If we don’t, the economic damage and the human cost will be much greater. Confidence is much more expensive to recover than to keep.
If we leave our debt problems unaddressed, those who lend us the resources to fund our past and future commitments will eventually demand higher interest rates. Government borrowing in the future will crowd out private investment. With so much capital being required to finance government debt, interest rates are likely to increase for other types of borrowing. Higher borrowing costs for American households and businesses will discourage future private investment, lowering our capital stock, reducing our economic growth and depressing our standard of living.
The costs of paying higher interest rates will make us poorer. Every dollar in interest payments means a dollar in higher future taxes or a dollar we can’t spend on more productive investments like education, our national security, or programs for the poor, the elderly or those with disabilities.
For all these reasons, the choice we face is not whether we start to get our fiscal house in order, but how we do it.
And to provide some context for the choices we must make now to preserve room for important investments in our future, consider the following facts:
--In the United States of America today, 40 percent of children born each year are covered by Medicaid. If you are born today in hard-pressed communities in many American cities, like St. Louis or Baltimore, you are more likely to die before your first birthday than if you were born in Sri Lanka or Belarus.
--In education, we’re losing ground. For example, in Los Angeles, only about half the kids graduate from high school.
--Over the next 25 years, the number of Americans eligible for Medicare and Social Security will nearly double, while the number of working age Americans will only increase by about 10 percent, putting substantial new burdens on working Americans.
--We live in a dangerous world, with our young men and women fighting and dying to protect our freedom. We spend $700 billion a year on national security, and this is only about two-thirds of what we spent as a share of our economy during the Cold War.
--The effective income tax rate for the wealthiest Americans – those earning more than $250,000 a year – is at its lowest level in 50 years. And the effective rate for the very rich – those earning over $10 million per year – has declined much further and is now around 21 percent.
Clearly, we have some tough choices to make. To put us on a path to living within our means, we have to bring our deficits down, gradually but dramatically, over the next three to five years.
We need to cut the annual deficits, now roughly 10 percent of GDP, to the point where the overall debt burden begins to fall as a share of the economy.
This requires that we achieve and maintain what economists call primary surplus, which means that we cut what we spend, on everything except interest payments, to less than we raise in revenues.
For the United States, this means a deficit below 3 percent of GDP.
Achieving this is the essential test of fiscal sustainability.
But we can’t do this too quickly. It has to be a multi-year process, with cuts phased in over time, that doesn’t put at risk an economy coming out of crisis. With interest rates very low, we cannot count on the Federal Reserve to be able to offset the contractionary effects on economic growth of a lurch to excessive austerity.
If we put our deficits on a path to get them below 3 percent of GDP by 2015 and hold them there, with reforms that politicians commit to sustain, then the federal debt held by the public will peak in the range of 70 to 80 percent of GDP, and then start to fall.
The economic and political question is not whether but how best to achieve this objective. The debate we now confront is how to cut these deficits while strengthening our ability to grow and compete, protecting our national security interests, and preserving health care and retirement security for the elderly, the poor and people with disabilities.