While Congress and the administration agonize over the debt ceiling and how to reduce future deficits, the world is not standing still. Recovery from the Great Recession has slowed to a worrisome crawl, dramatizing the urgency of accelerating economic growth and job creation. At the same time, the debt crisis in Europe and the concerns of rating agencies about U.S Treasuries are ominous warnings that we, too, could face a debt crisis that would damage future prosperity. Is the weakening economy a signal that we need to avoid derailing recovery with too-rapid debt reduction and add more stimulus to grow the economy and create jobs? Or do the warnings about a possible debt crisis increase the urgency of taking steps to control future debt? Counter intuitively, the answer to both questions is “yes.”
This double imperative—growing faster and controlling future debt—is hardly news, but recent developments highlight the urgency of doing both vigorously and soon. Unfortunately, our starkly polarized party politics makes it almost impossible for politicians to work across party lines to achieve either goal, let alone both. The result is policy paralysis as we hurtle toward the totally unnecessary catastrophe of national default, which would make the great recession pale in comparison. Whoa—can this really be happening?
Understandably, for the last two years, the president and his party concentrated on halting the deep slide in growth and jobs that followed the financial crisis of 2008. They succeeded in turning a rout into a moderate recovery through a combination of spending stimulus, tax cuts and low interest rates—a remarkable achievement given the enormity of the financial and housing meltdown. But they made a huge tactical mistake in not marrying their anti recession program to serious long-run debt control. They should have coupled the anti-recession program with credible legislative proposals to slow long run spending for Medicare and Medicaid, make Social Security permanently solvent and raise more future revenue from a reformed tax system. Instead, they said, “Yea, right—we’ll get to that later,” and lost their hard-won credibility as the party of fiscal responsibility.
With Democrats’ down-playing the dangers of rising debt, Republicans reemerged as champions of fiscal responsibility–a role they rejected in the Bush years. They proposed deep spending cuts aimed at reducing government’s reach and controlling future debt without increasing revenues. As illustrated in the budget resolution passed by the House, the arithmetic of this approach requires such deep cuts in popular programs, especially Medicare, that even many Republicans regard them as inhumane and politically infeasible. Democrats see outrage as a winning political strategy. So we are now hurtling toward a debt crisis with policy deadlocked on both of the nation’s most urgent challenges.
To break this deadlock, the parties have to compromise on some deeply held positions, and only the president can exert the necessary leadership to cut the deal. A compromise package should have four elements. The first is near-term fiscal easing to keep the recovery from sputtering—for example, enhancing the payroll tax holiday or aiding states to slow the reduction in their payrolls. The second is firm, enforceable caps on discretionary spending, both defense and domestic. The third is entitlement reform through a credible restructuring of Medicare and Medicaid to slow future growth as the boomers retire, and far-in-the-future tweaks that put Social Security on a sustainable path. The fourth is tax reform that raises more revenue from simpler broader-based individual and corporate income taxes with lower marginal rates.
There is a lot here for both parties not to like, but that is the essence of a bipartisan solution. Republicans worry that spending caps will threaten national security and Democrats that domestic needs will suffer. Both need to recognize that not all government money is well spent. Democrats are terrified of entitlement reforms and Republicans of tax increases, but there will be no solution without some of each. On entitlements, Democrats have to accept that the status quo is not an option and Republicans that draconian benefit cuts are not acceptable. On revenues, Democrats have to recognize that the debt can’t be stabilized just by taxing the very rich; the middle class will have to contribute too. Republicans have to recognize that in the face of a rapidly increasing older population, it is undesirable to hold spending at historic levels, so we need more revenues. Both parties should recognize that entitlements and earmarks in the tax code are the same as spending, and phasing them out can enhance growth.
Rightly or wrongly, the president is widely seen as standing on the side-line at this crucial moment when his strong leadership is needed to save the country from a dismal economic future. He needs to hammer home to the American people—not just in one speech, but over and over again—the need for action and the dire consequences of failure to move toward the two goals. He needs to espouse all four elements of the solution and reach out actively to Republicans and his own party to fashion a detailed plan. Hammering out specifics will take time, but the framework must be agreed on quickly, so the debt ceiling can be raised and absurdly costly default avoided while the work proceeds.
Leadership can’t be delegated to commissions or taskforces. Mr. President, please get out front!
Sentiment inside the Beltway has turned sharply against China. There are many issues where the two parties sound more or less the same. Trump and others in the administration seem heavily invested in a ‘get very tough with China’ stance. It’s possible that some Democrats might argue that a decoupling strategy borders on lunacy. But if Trump believes this will play well with his core constituencies as his reelection campaign moves into high gear, he will probably decide to stick with it, if the costs and the collateral damage seem manageable. But that’s a very big if, especially if the downsides of a protracted trade war for both American consumers and for American firms become increasingly apparent.