Cut Spending, Increase Taxes, Or Do Nothing?

Robert Schmidt reports on concerns expressed by Treasury Secretary Timothy Geithner ("Geithner Vows to Cut U.S. Deficit on Rating Concern (Update2)," Bloomberg, May 22, 2009).

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

To close the deficit, our elected officials can cut spending or increase taxes.  Of course, they can also do nothing and let the large deficits fester.  Which course will they follow?