OMB director warns growing deficit a threat to American economy

White House Budget Director Peter Orszag warned Tuesday that large federal deficits will eventually imperil the U.S. economy because they will lead to higher interest rates and more borrowing from overseas.

Orszag, in a speech in New York, said that deficits, expected to add $9 trillion to the current national debt of $12 trillion over the next decade, are "serious and ultimately unsustainable."

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Orszag said that deficit spending was necessary to help boost the economy when unemployment is hovering around 10 percent. But he said that red ink must be stopped as the economy recovers. During a recovery, private investment will again pick up and compete with the federal government for capital.

"It is at this point that we are likely to observe a rise in interest rates, an increase in borrowing from abroad, or some combination thereof due to the deficits," Orszag said. "And it is at that point that deficits will be putting the health of our economy in jeopardy rather than helping to mitigate the most severe economic downturn in more than 50 years, as they are now."

Orszag said President Barack Obama's administration is looking at proposals to rein in deficits as it works on its fiscal 2011 budget request, to be released in February. Orszag, however, did not specify what the proposals were. He repeated the White House's vow to cut the deficit it inherited in half by the end of Obama's first term.

Orszag blamed the expected growth in debt on the recession and the economic policies of former President George W. Bush's administration. Orszag said $5 trillion of the expected $9 trillion in red ink over the next 10 years is the result of tax cuts and the Medicare Part D prescription drug benefit. Obama has proposed extending the tax cuts for Americans making less than $200,000 but allowing the cuts for wealthier Americans to expire.

The rest of the deficit spending stems from about $3.5 billion in increased spending on programs aimed at providing recession relief, including unemployment insurance and food stamps, and because of the $787 billion stimulus.

"All told, the entire $9 trillion deficit reflects the failure to pay for policies in the past and the cost of the worst economic downturn since the Great Depression and the steps we had to take to combat it," Orszag said.

Democratic senators have begun to raise concerns about deficit spending. Sen. Evan Bayh (D-Ind.), eight other Senate Democrats and one independent called on Senate leadership to consider a special legislative process to produce a package of fiscal recovery reforms. Bayh said that the special process should be considered during debate over an increase in the $12.1 trillion debt limit, which must be approved by the upper chamber within weeks.

Republicans used the growth of deficits to attack Democrats and the Obama administration as being fiscally irresponsible. They have also pointed to the rise in unemployment this year as evidence that stimulus spending isn't working.

Orszag on Tuesday credited the stimulus with helping break the "potential vicious recessionary cycle" that the economy faced as it began to contract. He also said that the stimulus was responsible for virtually all of the 3.5 percent annualized economic growth in the third quarter of this year.

He noted a recovery in jobs is expected to lag behind GDP growth.

"The typical progression in a recovery is first an increase in productivity, then an increase in hours worked, and finally, the hiring of additional workers by firms," Orszag said. "We are somewhere between the first and second stages of this process."