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As Deficit Anxiety Fades, Debt Rears Its Ugly Head

Democrats and Republicans have exhausted themselves politically after failing to reach a grand bargain to reduce the debt. Now there's a new economic debate in Washington over economic growth, mobility and income inequality.

But without dealing with the debt, Republicans and Democrats might not be able to navigate even the issues they agree on.

Moving Away From The Deficit

In President Obama's State of the Union address last month, he all but declared victory on the federal deficit. He ticked off the country's accomplishments: a housing rebound, more manufacturing jobs and "our deficits cut by more than half," he said.

The annual budget deficit has indeed decreased from 9.8 percent of the country's gross domestic product when Obama took office to 4.1 percent now, according to the Congressional Budget Office. But the national debt — how much the country owes from accumulating deficits from year to year — is still a huge problem. At 74 percent of GDP, it's the highest since 1950, and it's projected to grow.

The president didn't talk about that in his State of the Union. Instead, he effectively closed the door on the debt and deficit debate that's consumed Washington for the last three years by hailing last year budget agreement.

"Nobody got everything they wanted, and we can still do more to invest in this country's future while bringing down our deficit in a balanced way. But the budget compromise should leave us freer to focus on creating new jobs, not creating new crises," he said.

Translation: I'm finished with the futile effort to strike a budget deal with Republicans.

House Speaker John Boehner, the president's on-again, off-again partner in that fruitless exercise, made it clear he felt the same way.

"It's become obvious to me after having tried to work with the President over the last three years, that he will not deal with our long-term spending problems unless Republicans agree to raise taxes, and we are not going to raise taxes," Boehner said last week.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, heads the campaign to fix the debt. Lately, she's been on the losing side of the battle: Republicans appear ready to thrown in the towel on using the upcoming debt-ceiling deadline as leverage on the deficit.

"Basically, the only thing that there's real bipartisan agreement on from the parties is, let's try to sweep this under the rug for a little bit longer," she says.

No Money For Solutions

While Republicans took the lead in the deficit debate, forcing a reluctant Obama to deal with the issue after he lost control of Congress in 2010, both sides were eager participants in this year's debate about social and economic mobility.

"It doesn't mean it automatically leads to a set of bipartisan solutions," veteran GOP strategist Vin Weber says, "but at least the problem itself is mutually recognized by people on the left and the right."

Democrats want investments in infrastructure and early childhood education. Republicans want tax reform. Both sides agree would that all of these would boost growth and reduce inequality. Those bipartisan priorities were supposed to be the rewards of a grand bargain — that big compromise no one in Washington wants to make.

But the president is handicapped by his past failure to reach a grand bargain on the deficit: There's little money to spend on these priorities. That's because, in the short term, the deficit has been cut mainly by cutting the domestic discretionary side of the budget, instead of the real long-term drivers of the debt, such as the cost of Baby Boomers' retirement.

The annually appropriated part of the budget is now smaller than it's been since Eisenhower was president. That means there's less money available for expenses that people in both parties think will benefit the economy, says David Wessel of the Brookings Institute.

"Everything that you might consider an investment in the future —infrastructure, education, health research — is in that [discretionary] category, and that's being squeezed," he says.

The country can't deal with economic mobility and income inequality when it has unsustainable deficits, MacGuineas says. "Because we've been so irresponsible for years, our hands are kind of tied as a country," she says.

The only way to address the deficit to revisit that well-examined but politically unattainable deal, one where Republicans agree to raise revenue by closing tax loopholes and Democrats agree to cut entitlements.

While some small things might be possible this year — a bit of corporate tax reform, some small investments in education — the big fiscal problems are still out there, waiting for a new president and a new Congress to solve them.

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