The Economist: Jumping off the fiscal cliff
The current political mess in D.C. is leading our country on a path to nowhere. I’m pretty cynical about politics in the best of times, observing that with very few exceptions those smart enough to hold a national political office are too smart to want the job. But this is beyond ridiculous.
It doesn’t take a Ph.D. in economics to recognize that in the short term we need to create jobs and in the medium and long term we need to balance the budget. Southern Europe is showing us the futility of trying to shrink your way to prosperity. They are also providing example after example of what happens when you allow your debt to reach a point that investors are afraid to purchase it.
Meanwhile, back in D.C., our Congress has decided that the smart thing to do is to raise taxes by $400 billion and cut spending by $200 billion. That’s 3.8 percent of the nation’s output of goods and services, enough to classify as the Great Recession: Part 2. Then, for fun, they can let the Treasury bump up against the $16.4 trillion debt ceiling, garnering headlines every day with the threat of technical defaults on Treasury securities and the shutdown of government departments.
It is self-defeating behavior. Perhaps the biggest factor preventing a more robust recovery from the Great Recession is uncertainty. Businesses, flush with cash, are too uncertain to make job-creating investments. Banks, more liquid than they’ve been in years, are unwilling to make job-creating loans. Consumers, worried about the future, are afraid to make job-creating expenditures on goods and services.
Congress compounds this uncertainty by its unwillingness to compromise on – or even discuss – important issues. A friend who works in the Capitol in D.C. told me that the Senate Dining Room, once the place where representatives of opposing parties got together to thrash out compromises, is practically empty.
A few people have tried to reach an agreement on important issues. The Bowles-Simpson Commission, the Gang of Six. But the vast majority says it is blue if the other party says it is red, even though a few years ago they firmly supported the opposite point of view. What’s a poor president – be he Democrat or Republican – to do?
The simple model of the market economy that we studied in Economics 101 is based on buyers and sellers having perfect information. Of course that never occurs in the world outside the ivory tower. But the lack of information we have today is unprecedented, at least in our lifetime. What is going to happen in Europe? Will the euro survive? What about China? Brazil? Drug wars in Mexico? Will/can the Federal Reserve keep interest rates low? Will housing prices increase? What about the stock market? Social Security? Medicare? Will Congress remain dysfunctional?
I have great faith in the American people and in our system of government and economics. "The United States will always do the right thing – when all other possibilities have been exhausted," Winston Churchill famously said. But we are rapidly running out of options and time.
It is going to be interesting to see the outcome of the November election, not so much for the president as for Congress. Everyone I talk to professes to be totally disgusted with the people we’ve sent to D.C. and their unwillingness to make the compromises necessary to govern well. Will we "throw the rascals out" in November? Or vote to keep our own rascals in office, which is the only vote we get to cast? If we follow our usual practice of returning 95 percent or more of incumbents, it says to me that the American people are pretty happy with the way things are going.
I haven’t given up hope. But if we want to return to a healthy economy that offers jobs for the unemployed, decent incomes for those who work and security for the retired, we better insist that Congress get back to the job of running the government instead of acting like spoiled children who insist on getting their own way.