Financial Times

America Will Fix its Debt Problem, Once It’s Exhausted the Alternatives

The following is William Galston's response to Mort Zuckerman's America has no choice but to enter its own age of austerity, orginally published in the Financial Times.

As the U.S. 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 U.S. has become an entitlement state, with programmes such as Social Security, Medicare and Medicaid constituting an ever-increasing share of the U.S. federal budget and gross domestic product. Many Democrats see the defense of these programs 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 U.S. 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.