WASHINGTON — The co-chairman of President Barack Obama's deficit reduction commission said Tuesday that Obama would endorse its findings, including politically toxic tax increases and painful cuts to retirement benefits that the president was unwilling to propose on his own.
But even as Obama urged the 18-member bipartisan panel to keep open all of its options to fight "exploding deficits," forces on the right and left were urging just the opposite.
In opening-day testimony before the commission, panel members were amply warned that failure to reduce the deficit could lead to higher interest rates, harm the economy and ultimately erode Americans' standard of living.
"The path forward contains many difficult trade-offs and choices, but postponing those choices and failing to put the nation's finances on a sustainable long-run trajectory would ultimately do great damage to our economy," Federal Reserve Chairman Bernanke said.
As Bernanke testified, the stock market began a precipitous dive as Standard & Poor's downgraded the debt of Greece, which is caught in a debt crisis, to junk bond status.
Obama urged panel members to rise above Washington's bitter partisan atmosphere.
"There are few issues on which there is more vigorous bipartisan agreement than fiscal responsibility," Obama said, flanked by Erskine Bowles and former Sen. Alan Simpson, R-Wyo., the two men he asked to lead efforts to reach a consensus plan for the deficit. "But in practice, this responsibility for the future is often overwhelmed by the politics of the moment."
Obama explicitly told reporters in the White House's Rose Garden that neither he nor commission members would say what deficit-closing options remain viable.
"We're not playing that game. I'm not going to say what's in. I'm not going to say what's out. I want this commission to be free to do its work," the president said.
It's a task, though, that won't be easy: produce a deficit no bigger than $550 billion by 2015, an amount equal to about 3 percent of the total U.S. economy. That would require deficit savings in the range of $250 billion or more.
"Spending cuts will have to affect programs we all care about and benefit from and revenue increases will have to come from a wide swath of Americans," Urban Institute President Robert Reischauer said. "In other words, raising taxes on the rich or corporations, closing tax loopholes, eliminating wasteful or low-priority programs and prohibiting earmarks simply won't be enough."
Bernanke made his most urgent call yet to get the government's fiscal house in order. Failing to curb deficits – $1.4 trillion last year – would push interest rates higher, not only for Americans buying cars, homes and other things but also for the government to service its debt payments, he said.
White House budget chief Peter Orszag told the commission: "Substantial deficits projected far into the future could cause the market to rapidly lose confidence in the government's creditworthiness, producing a spike in interest rates and fundamentally disrupting economic activity more broadly."
Bowles, a former chief of staff to President Bill Clinton, said the key to a successful result would be for panel members to establish trust and put politics aside. Obama will endorse its findings it the required 14 members can agree, Bowles said.
"He has insisted every time he's talked to Al and me that everything is on the table, that he will support the conclusions of this committee, if we have the courage to make the recommendations," Bowles said.
But the options for curbing the deficit – cutting spending on popular entitlement programs and broad-based tax increases – are so politically toxic that the only way Obama and his Democratic allies controlling Congress are willing to take them on during this midterm election year is through the commission.
The powerful seniors' lobby AARP issued a news release warning it to "Take Social Security Off the Table for Deficit Reduction."
AARP Chief Executive Officer A. Barry Rand warned the panel that it must make sure "that efforts to rein in the deficit do not harm Social Security and Medicare benefits and thus jeopardize the retirement and health security of today and tomorrow's retirees."
On the other side of the spectrum, several House Republicans urged the panel to swear off tax increases.
"The commission's first act should be to take tax increases off the table," said Rep. Patrick McHenry, R-N.C.
"Conservatives on this commission need to open their minds to the safety net in our country and the troubling plight of many working Americans," said panel member Dick Durbin, D-Ill., the No. 2 Democrat in the Senate. "And the bleeding-heart liberals on this commission have to open their mind to what it takes to inspire competition and economic growth in our economy and make real sacrifices to strengthen our nation."
The deficit has turned alarmingly worse since the recession that started at the end of 2007. Many projections show its size never dipping below 4 percent of the economy over the next decade. Deficits of that magnitude are unsustainable, economists say. They would put upward pressure on interest rates, crowd out private investment and ultimately erode living standards.
The quickly growing national debt – the accumulation of years of annual budget deficits – today stands at a staggering $12.88 trillion and the Congressional Budget Office expects the nation to add another $1 trillion a year for another decade. The federal government itself holds a large portion of this debt, some $4.5 trillion, with much of it sitting in the Social Security Trust Fund.
The remaining $8.5 trillion is held by worldwide investors in the form of Treasury bills and bonds. China is the largest single holder of these securities.