Insolvency: The Price of American Myopia

by Thomas Granado

Despite a humble recovery, the U.S. economy remains vulnerable because of its tenuous fiscal position. Public debt is not new to America, but its post-crisis balance sheet bleeds as never before while its spendthrift leaders offer only worn out political patchwork. To prevent a debt crisis, American leaders must signal to its creditors and allies that it appreciates the risks. They must acknowledge an enduring feature of the global political economy: a state’s strength comes from its economic robustness—a key component of which is creditworthiness—and the degree to which it can be a political model worth emulating and an ally worth having. In an increasingly competitive global economy, a debt-ridden, profligate nation cannot sustain deficits forever. At some point creditors will revolt and Americans will suffer the consequences.

President Obama continues to prescribe band-aids such as the divisive Buffett Rule. “It will help us close our deficit,” the President claims. But as a mechanism to curtail the national debt, the Buffett Rule is a sham. The Joint Committee on Taxation estimates this new tax could yield less than $5 billion a year—or about 11 hours of government—but even that relatively trivial revenue may not materialize. Economic history shows that raising taxes on capital gains does not guarantee increased revenues. The Buffett Rule is smoke and mirrors, a diversion from an expensive, dubiously efficacious, “hair-of-the-dog” recovery program and the President’s failure to address the foreseeable debt crisis. As Charles Krauthammer recently put it, “The Buffett Rule redistributes deck chairs on the Titanic, ostensibly to make more available for those in steerage. Nice idea, but the iceberg cometh.” It’s astute politics, myopic policy.

But perhaps the President has backed himself into a corner. In 2008 he said he’d raise the capital gains tax—in the interest of fairness—even if credible economic models and empirical evidence advise against it. Well, fairness is the President’s 2012 platform. But if he wants to win independent voters skittish mainly about jobs, deficits, and debt, he must acknowledge that fairness often comes at the expense of growth and innovation, the preeminent drivers of deficit reduction.

What’s more, the President hasn’t proposed a single meaningful reform of entitlements—the principal budget items that bloat the deficit. Rather, Mr. Obama proposed universal health care that would somehow save money. The Congressional Budget Office recently estimated that the Affordable Care Act (ACA) would add $1.76 trillion in federal expenditures through 2022 to an already deficit-financed baseline. To his credit, the President has called for responsible cuts to defense spending, but they aren’t nearly enough to correct the fiscal course.

Deficits and debt matter, especially at current levels. Even before the financial crisis, analysts of all ideological stripes agreed that the risks are enormous. Economists Carmen Reinhart and Kenneth Rogoff estimate that GDP growth slows considerably when advanced economies reach a debt-to-GDP ratio of 90 percent—and U.S. debt is now over 100 percent of GDP. Unsurprisingly, the U.S. economy is growing anemically, with the unemployment rate hovering at 8.2% three years after an ineffective $787 billion stimulus package.

Perhaps even more worrisome, Admiral Mike Mullen, former Chairman of the Joint Chiefs of Staff, called U.S. debt the greatest threat to national securityHistorian Niall Ferguson states the danger starkly: “Most imperial falls are associated with fiscal crises… marked by sharp imbalances between revenues and expenditures, as well as difficulties financing the public debt.” It limits our capacity to respond to disasters or attack and to sustain an ample social safety net. Just as important, it is a morally corrupt practice that robs from posterity via higher future taxes.

Too many voters are ignorant of the largest drivers of deficits—Medicare, Social Security, and Medicaid. An April 2011 Economist/YouGov survey revealed that only 7 percent of Americans—including just 9 percent of Republicans—favored lower funding for Social Security. Medicare also came in at 7 percent, with 11 percent of Republicans. An August 2011 Economist/YouGov poll found that 56 percent of Americans believe that deficits can be curtailed without reductions in Social Security and Medicare. Americans must realize that shared sacrifice is essential to check the rapid growth of future liabilities.

Given the current CBO outlook a tipping point is likely, but neither crisis nor decline is inevitable. American leadership must prove that it can manage its public finances with prescient competence. There is room for budgetary compromise, but we need uncommon leadership. We need public servants, not inertial, self-aggrandizing political celebrities. We need adaptive statesmanship, not Robin Hood class warfare or uncompromising growthmanship. Using verifiable, publicly available data, U.S. fiscal authorities—the President chief among them—must move the needle of public opinion with respect to entitlements—even if it costs them their jobs. Fiscal fantasies and myopic demagoguery must come to an end.


About the Author

Thomas Granado is a Citicorp-Wriston Scholar at at The Fletcher School, where his concentrations are U.S. Political Economy and International Business. His MALD thesis looks at the political economy of U.S. debt in a historical context, and its sustainability and associated risks--both foreign and domestic--after the financial crisis. He is also a member of the Fletcher Fútbol team, president and co-founder of the Fletcher Debating Society, and Teaching Assistant for International Trade and Investment. Prior to Fletcher, he worked as a management consultant and project manager for two global tech firms.

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