U.S. deficit woes are not as dire as the fiscal problems of Greece and other nations, but a quick, credible action plan is still needed to avoid a future crisis, economists and policymakers said on Wednesday.
The warning came a day after the first public meeting of a bipartisan commission created by President Barack Obama to recommend ways to reduce the $1.4 trillion U.S. budget deficit and put the nation on a more secure fiscal path.
Global financial markets have grown nervous this week as EU and IMF officials negotiated a financial aid package for debt-riddled Greece amid fears the crisis was spreading to other southern European nations.
We're not Greece, but Greece can serve a useful lesson, said Alice Rivlin, a former director of the Congressional Budget Office who sits on the National Commission on Fiscal Responsibility and Reform established by Obama.
If you have massive debt, eventually your creditors loose confidence, Rivlin, who now works at the liberal-leaning Brookings Institution, said in remarks at a conference sponsored by the Peter G. Peterson Foundation in Washington.
Republican U.S. Representative Paul Ryan told the same conference that the problems in Europe pointed to a coming debt crisis in the United States.
We know interest compounds viciously once interest rates go up. This is something that is obvious, easy to predict and therefore something we should tackle, said Ryan, the top Republican on the House Budget Committee and a member of the deficit commission.
Former White House economic adviser Robert Rubin urged the development of an action plan that was real and credible to the financial markets, but he cautioned policymakers against pushing too quickly on the deficit for fear of unraveling a fragile economic recovery.
The U.S. unemployment rate was 9.7 percent in March.
VAT MAY BE TOO TOXIC
Policymakers and leading members of the deficit commission, however, suggested it might not get far in resolving the nation's long-term debt problems.
The odds are still small, former Federal Reserve Chairman Alan Greenspan told the conference. It is going to be very tough and I wish them well.
Former U.S. Senator Alan Simpson, a Republican who is heading the commission along with Erskine Bowles, who served as former President Bill Clinton's chief of staff, expressed concern about political attacks from the left and right.
We may be only able to move the football a yard, Simpson said.
Obama gave the commission broad leeway in its consideration of the revenue increases and spending cuts needed to reduce deficits and tackle the country's mounting debt, much of which is held by China and other countries.
Some analysts believe the $12 trillion debt could double in a decade or so if nothing is done to reduce the gap between spending and revenues.
But a European-style value-added tax, which has been discussed as a move that could boost government revenues, appears to be too politically toxic now.
It's never been popular in the United States, Paul Volcker, the former Federal Reserve Chairman and a special economic adviser to Obama, told the conference in a taped interview.
I don't think it's on the political table in the near future, Volcker said. But that is the kind of thing we have to look at.
Talk of a VAT, which is applied to each stage of production, has sparked concern among conservatives that the commission is a stalking horse for raising taxes.
Volcker also suggested policymakers begin their deficit tackling efforts with the government-run Social Security retirement program, which faces increasing financial strains as the baby boom generation.
The first wave of baby boomers -- those born between 1946 and 1964 -- have already begun drawing benefits.
Tackling Social Security does not sit well with many liberal groups. Roger Hickey, go-director of the Campaign for America's Future advocacy group, said it will drive home the belief among many that it's the little guys who will end up paying for the fiscal problems he said were caused by the Wall Street crisis and economic downturn.
(additional reporting by Caren Bohan; editing by Paul Simao)