Consumers, banks and businesses have been busy getting their balance sheets into better shape since the U.S. economic recovery began more than three years ago. Now, it's the government's turn.
Whoever wins the presidency will contend with a budget on a trajectory dubbed unsustainable by Federal Reserve Chairman Ben Bernanke. How the new president goes about it will influence the direction of financial markets and define the economy and society for his four-year term and beyond.
"We've made a lot of progress getting the private-sector balance sheet in order," said Mark Zandi, chief economist at Moody's Analytics. "Where we've got a lot of work to do is on the public side."
Research from Harvard University economists Carmen Reinhart and Kenneth Rogoff shows why it's necessary to do that work. Their data on sovereign indebtedness demonstrates that growth has been hobbled when central government debt is more than 90 percent of annual gross domestic product five years in a row. The United States is now at the Reinhart-Rogoff debt threshold.
Gross federal debt has exceeded 90 percent of GDP for the past two years and is projected to remain above that level through 2017 at least, according to the White House's Office of Management and Budget. Even publicly held debt, which excludes the special-issue securities held by the Social Security trust fund and other government agencies, reached 68 percent of GDP in 2011.
The costs of doing nothing are rising. Unless and until business leaders see that the gridlock in Washington can be broken, they're going to be reluctant to make investments or hire more workers, according to Honeywell International Inc. Chief Executive David Cote. "What it causes you to do is sit there and say, 'I'm better off waiting right now. I shouldn't spend my shareowners' money until I have some sense of where things are going.'"