The American public gets it, even if successive US administrations have not. There are more than 12m families who get it particularly well: they are those who owe more on their mortgage than their homes are worth. They know we have been running on empty for years. Now Barack Obama has officially withdrawn from the current round of budget talks, reducing hopes of a deal on tax rises and spending cuts, a new era of American austerity is the only way to put things right.
No wonder this is being called the most predictable crisis in US history. For who could dispute, when our government must borrow $4.5bn a day just to keep going, that our national debt is now an existential threat? Wimpy, a character in the cartoon Popeye, got our attitude right: “I’ll gladly pay you Tuesday for a hamburger today.”
Knowledgeable people in finance are aware that the US Federal Reserve has been buying 70 per cent of all new Treasury paper, making the government by far the largest client of its own debt. This is possible only by increasing the money supply and the balance sheet of the Fed itself, a practice that sooner or later must blow up.
That is not the only risk: the economists Carmen Reinhart and Kenneth Rogoff have shown that economic growth deteriorates as total government debt exceeds 90 per cent of gross domestic product. America is already in that range. Indeed, the real facts are even worse, for we are also now in the midst of the familiar Washington game of kidding ourselves about the size of the deficit. It is already at $1,645bn for the next fiscal year. The Congressional Budget Office concludes that President Obama’s most recent budget underestimates spending while also overestimates revenues.
But for now politics as usual predominates. The Republicans, elected to reduce debt, are struggling to find good reasons to raise the limit. To avoid humiliation in front of their constituents they feel they must secure unprecedented cuts. Tapping into America’s gut sense that getting out of debt means cutting up your credit cards, the House speaker John Boehner feels he is on solid ground insisting on cuts but no tax increases in any deal.
Mr Obama’s initial response was just as divisive, attempting to play-off the rest of America against cruel Republicans and the wealthy. Yet his harsh tone then made a rational bipartisan agreement more difficult. And any deal must be bipartisan, so neither party can blame the other for necessarily unpopular action. Both must therefore make concessions.
Yet cuts and tax rises remains politically treacherous. Senior citizens, in particular, will vote against any changes to healthcare and retirement programmes. Both parties hope to keep their bases on side, while seeking support from those independent voters – who are focused on fiscal probity and represent 29 per cent of the electorate – whose views will be crucial during the next year’s presidential election.
In truth there is no politically viable way to raise sufficient taxes to solve our deficit problem. Given this, the only serious way forward is through long-term spending reductions, especially in entitlement programmes. But the Democrats are in hock to the unions, and refuse to cut the two programmes that dominate the nation’s long-term balance sheet, Social Security and Medicare. Most conservatives, meanwhile, won’t touch spending on their own pet programmes, not least defence and farm subsidies.
Given we can’t raise taxes enough to cover the scale of our deficit problem, America now has no choice but to enter our own age of austerity, namely long-term spending reductions. Britain has gone down this path, and is managing well. There have been protests, but their government has held fast – because it understands, as we must, that the scale of deficits and debt demands nothing less.
This is a new world for America, and one requiring firm new policies. Yet, to date, we become only more politically dysfunctional. Mr Obama is in a delicate position. He can’t let the country default on his watch, but risks just that if he insists on tax rises Republicans can’t stomach. Nor, except in vague terms, has he offered adequate spending cuts of his own. His talk of $1,000bn in cuts seems large, but in truth it is nowhere near enough to change the trajectory of our debt.
There was a brief moment when most of us thought a large scale deal was possible, providing $4,000bn of deficit reductions over the next decade. No longer: now all we have is a smaller $2,000bn package on the table. Even then both parties now worry that short-term cuts might harm America’s faltering growth, extend the recession and reduce tax revenues – and therefore increase the federal deficit.
The best that can be said is that both parties are now talking about constraints on spending, rather than new programmes, and of increasing revenues not by tax increases but through the elimination of special tax allowances. It may even be beginning to dawn on both sides that they are arguing in the path of an avalanche. Just think: in the few minutes that it took you to read this column, the US national debt went up by more than $6m. It will take more than a short-term deal to put that right.
The writer is editor-in-chief of US News & World Report and chairman, chief executive and co-founder of Boston Properties, a leading US real estate group.
America will do the right thing, once it’s exhausted the alternatives
As the US careens toward possible default on its debt obligations, Mort Zuckerman’s piece raises two obvious questions: how did a great nation end up in this fix? And how can it change course?
A number of trends have combined to produce the impasse. Supply-side economics has hardened into an anti-tax orthodoxy, and the Republican party now pays fealty to the views of the anti-tax crusader Grover Norquist and his loophole-free pledge, to which virtually all Republicans in the House of Representatives and the Senate are signatories.
John Boehner, the speaker of the House, inclines toward the older fiscal conservatism, but he has few supporters. When news of his would-be “grand bargain” with President Barack Obama broke, his rank-and-file, egged on by his lean and hungry young lieutenant, revolted and forced him to beat a humiliating retreat. The alternative was wagering, and probably forfeiting, his speakership.
During this same period, the US has become an entitlement state, with programmes such as Social Security, Medicare and Medicaid constituting an ever-increasing share of the US federal budget and gross domestic product. Many Democrats see the defence of these programmes as their raison d’être and resist even modest proposals for reform.
It has also become increasingly polarised, although the Republicans are more monolithically conservative than the Democrats are liberal. Had the grand bargain remained on offer, Mr Obama could have carried more of his party with him than Mr Boehner; how much more is unclear.
Against this backdrop, few leaders in either party have been willing to level with the American people about problems the country faces. The people have been given to understand that default can occur without serious consequences, that deficits don’t matter, that government functions can continue as the revenue base withers – and that if there is a problem, it can be solved without any sacrifice on the part of the middle class. As a result the people are unprepared for what lies ahead.
So what can be done? In the short-term default is unthinkable, which means that the ramshackle political system will muddle its way through. Senator Mitch McConnell, leader of the Senate Republicans, has offered a plan to allow the debt ceiling to rise without direct Republican complicity. Some members of his party are denouncing him as Pontius Pilate, while others are privately sighing with relief. In the end, Mr McConnell’s proposal, combined with a modest package of spending cuts plus an extension of payroll tax cuts, might receiving grudging support.
In the longer run, there is no choice: the US must pivot toward a fiscal policy that reverses the alarming rise in our debt-to-GDP ratio. And that means reducing our commitments, at home as well as abroad, and raising taxes – and not just on the rich.
Americans have the opportunity to do both of these things, while boosting growth, by reforming their obsolete tax code and making strategic investments in education, research, entrepreneurial innovation, and infrastructure. Winston Churchill once observed that you can count on Americans to do the right thing—after they have exhausted all the alternatives. Before the end of the decade, we’ll find out whether his optimism about American policy-making still holds true.
The writer is a senior fellow at the Brookings Institution.