Put away the frisbee and move on to debt

This is what passes for crisis resolution in the new Rome. Yesterday, groups concerned about America's huge public debt hosted a "budgetball" tournament on the Washington mall, the stretch of green where the city's federal offices, museums and monuments are gathered. Budgetball, this column is informed, is a derivative of ultimate Frisbee developed "to build awareness, especially among young people, about the nation's growing financial challenges and the trade-offs involved in solving them". Team sheets were filled from a cadre of university students on one side and government officials and heads of aid groups on the other. The event was sponsored by the Peter G Peterson Foundation, which has been sounding the alarm about America's borrowing binge for years, though sadly to little effect. Unless they demonstrate a level of courage and sacrifice not seen in Washington since the British burned it in 1814, this country's ruling elite are poised to be slammed by a train of debt as they peer between the tracks in search of spare change. That, in essence, is the conclusion of a report making the rounds in Washington about the pedigree and perils of America's record deficits. Authored by Alan Auerbach, an economics professor at the University of California at Berkeley, and William Gale of the Brookings Institution, the study projects federal deficits will average at least US$1 trillion (Dh3.67tn) for the next 10 years. And that's assuming the economy recovers completely from the global crisis and the stimulus packages introduced by Barack Obama, the US president, are allowed to expire in two years. The report estimates the federal debt will account for between 7 and 9 per cent of US GDP for the foreseeable future, its highest level since the Second World War. Such a rate of borrowing may be impossible to sustain, the study suggests, and default on the five-year US treasury bill is a distinct possibility. The authors urge politicians to respond to the country's debt trap with the same resources and alacrity as it would to a national security threat. "Although fiscal policy problems are usually described as medium and long-term issues, the future may be upon us much sooner than previously expected," they wrote. The report lays much of the blame for America's financial woes at the feet of George W Bush, the former president. When Mr Bush assumed office in 2001, the congressional budget office estimated that the government would manage an average annual surplus of more than $800 billion a year from this year to 2012. Thanks to eight years of Bush tax cuts, fiscal extravagance and two costly wars, the US economy is now a ward of creditor governments from Beijing to Riyadh. Through little choice of his own, Mr Obama has continued his predecessor's bank bailout, as well as rescue packages and a huge stimulus programme of his own. The Obama administration seems to appreciate the urgency expressed in the Auerbach/Gale report. This month Ben Bernanke, the Federal Reserve chairman, urged Congress to cut long-term budget deficits to avoid "an unsustainable situation". Last week, Mr Obama met legislators and announced he would revive the "pay-as-you-go" law, which requires that tax cuts or new entitlement programmes be paid for with budget cuts or tax increases. But the so-called "pay-go" law did little to control spending when it was in effect from 1990 to 2002 because Congress routinely made major funding programmes exempt. The Heritage Foundation, a conservative think tank that criticised Bush profligacy long before Mr Obama arrived, called pay-go's revival "a distraction" from the real work of fiscal restraint. Now that America's baby boom generation is shuffling into retirement age only the wholesale reform of major entitlement programmes, starting with the national health and pension fund, can restore the country's economic security. The past two US presidents tried to do just that. Mr Bush made restructuring social security the touchstone of his second term, while Bill Clinton unveiled an ambitious healthcare plan almost immediately after his swearing in. Both men were handed their heads by an unco-operative Congress. It is now Mr Obama's turn in the breach and he has not a moment to lose. Last week, the rating agency Standard & Poor's issued a report with a warning, however oblique, about the precariousness of America's financial position. According to S&P's, several governments in East Asia, which until now have met Washington's borrowing needs with a cheap and reliable credit line, risk debt downgrades due to heavy borrowing associated with their own stimulus and bailout packages. That means the appetite for US treasuries may continue to wane - yields last week reached their highest levels in a year - and America's debt habit will become increasingly costly to support. Enough Frisbee. Enough budgetball. It's time for some chin-level political hardball. [e-mail]