Even as the stock market responded positively yesterday to the Obama administration's plan to spend $1 trillion to purchase toxic bank assets, the Congressional Budget Office's new forecast of soaring federal deficits should be a wake-up call to Washington.
The nonpartisan CBO said red ink from the current Year of the Bailout that began Oct. 1 will total a record $1.85 trillion, or 13.1 percent of gross domestic product. While that short-term number is staggering, it's not the real surprise in this report.
The more worrisome projection is that Obama's proposed budget will create deficits averaging more than $925 billion per year over the next decade. The cumulative total of deficits over 10 years would be $9.27 trillion, or about $2.3 trillion higher than the administration predicted last month. The difference is because the White House used rosier assumptions for an economic recovery.
In just two years, debt held by the public would grow from 40.8 percent of GDP to 64.6 percent. Even Obama's budget chief admits those kinds of deficits are unsustainable.
The current year's deficit is due largely to necessary spending to fight the recession and prop up the financial industry, some of which was begun under President Bush. But unless Congress and Obama get a handle on costs now, an orgy of borrowing will crowd out the government's ability to pay for real needs later.
Currently, for every dollar the government spends on interest on the debt, it spends about $7.50 on education, housing, national parks and other discretionary items. The CBO forecasts that 10 years from now discretionary programs would get only $1.80 for every $1 spent on interest payments.
Massive debt eventually puts pressure on interest rates, now at historic lows, to rise. And that ultimately will hurt the ability of businesses to grow and create jobs.
Deficit forecasts are not terribly accurate; the Obama administration faults CBO for being too pessimistic in its assumptions about the strength of the economic recovery. But pinpointing the real 10-year deficit figure is hardly the point.
Under either projection, the government will be awash in red ink. And that imperils the country's long-term ability to enjoy economic growth and prosperity. Washington must come up with an "exit strategy" from debt.
There is also increasing doubt that countries which have been financing our deficit spending, such as China, will keep buying Treasury bills. Chinese premier Wen Jiabao has said he was "a little bit worried" that the $1.2 trillion that China is owed by the United States might lose some of its value. His comment was viewed by many as a signal that there's a limit to China's willingness to underwrite U.S. spending sprees.
In an interview with "60 Minutes," Obama said: "If we don't get a handle on this, and also start looking at our long-term deficit projections, at a certain point people will stop buying ... Treasury bills."
It's still early in the budget process, but so far Obama hasn't indicated where he is willing to make hard choices. He apparently has no intention of scaling back his health-care plan, his energy "cap and trade" proposal or other big priorities. Among the few cost savings outlined so far is a reduction of military forces in Iraq.
At some point, Obama also needs to follow through on his promises to curtail the growth in entitlement programs. It won't be popular politically, but the fiscal health of the nation depends on such reality checks.
Given the dire deficit predictions, Senate Budget Committee Chairman Kent Conrad (D., N.D.) is seeking to cut nearly $28 billion from Obama's proposed budget. It would be a small step, but an important one to put the government back on the path to fiscal sanity.