WHERE DO WE GO FROM HERE?

By Bill Breakstone, November 14, 2010

It’s extremely difficult for me to read the papers and watch the news these days without becoming very depressed. This morning’s New York Times “Week in Review” section is a good example. Being the insomniac that I am, I spent a few hours in the middle of the night pondering what’s become of our Nation, and drafted some thoughts, some of which were reinforced by several columns in the Times.

America today is a country in dire straits. The political arena is paralyzed by partisanship, not only between the parties, but also within the parties. Economically, we are as close to a dead end as anyone savvy with finance could attest to. On the fiscal side, the paralysis mentioned above precludes any action. On the monetary side, the Federal Reserve is doing its best, but that quiver of arrows is just about empty, and even Fed Chair Bernanke admits that they are treading on untested waters. Most economists will admit the Nation faces a triad of dangers: deflation; prolonged joblessness; and a Japanese-like “lost decade,” marked by sluggish growth.

This past week, the Deficit Commission co-chairs released their initial recommendations. Though they contain significant proposals, and should be debated by the full Commission, most seem politically unacceptable, and are drawing fire from all fronts. David Leonhardt’s excellent Times piece contains the following points

“The looming federal deficits are so large that they are likely to occupy much of Washington’s attention for years. Arguably, this new deficit obsession — what some are calling the Age of Austerity — began this month. The midterm elections ushered in a Republican House majority pledging to shrink government, and on Wednesday the leaders of the bipartisan panel released the outline of a deficit-cutting plan for the panel’s members to debate.”

“As a starting point, it is worth thinking about the deficit as being two different deficits. The first is the medium-term deficit, which was created by the Iraq and Afghanistan wars, the 2003 Medicare drug plan, the Bush tax cuts, the recession and the government’s responses, like the stimulus.”

“The medium-term deficit does not appear to pose a huge threat to the American economy. Maya MacGuinea of the New America Foundation points out that simply letting all of the Bush tax cuts expire, not just those benefiting the affluent, would nearly do the job.”

“The long-term deficit is a wholly different beast.”

“It comes from the projected growth of Medicare, Medicaid and, to a lesser extent, Social Security. It is the result of baby boomers’ having paid far less in taxes than they will draw in benefits. “The reason we find ourselves in this situation,” said Mr. Bowles, the former chief of staff for President Bill Clinton, “is that we’ve made promises we can’t keep.”

“The solution will have to revolve around tax increases and changes to health care and Social Security. And the country cannot wait until 2030 to implement most of the changes, notes Alan Auerbach, an economics professor at the University of California at Berkeley. If it did, the interest on the national debt could become crushingly large. Deficit cutting will probably be a regular part of politics for the next couple of decades.”

“One obvious debate will be taxes versus spending. But relying exclusively on one would be extremely difficult. An approach based only on spending would mean deep cuts to programs that many Americans consider to be the essence of government: Medicare, Social Security and the military, among others. Closing the entire deficit through taxes would require enormous tax increases, mostly because Medicare spending is expected to continue growing much faster than income. To keep up, tax rates would have to keep rising.”

“The real issues, then, are how much taxes should rise, how much spending should be cut — and what kinds of each change should take place.”

“No matter what you pick, keep in mind the potential effects on economic growth. Arguably, economic growth is the most important yardstick for any plan, because growth can do much to reduce the deficit, as it did after World War II and in the 1990s.”

“No matter what you pick, keep in mind the potential effects on economic growth. Arguably, economic growth is the most important yardstick for any plan, because growth can do much to reduce the deficit, as it did after World War II and in the 1990s.”

“This helps explain why many economists favor a version of tax reform that would lower marginal rates and close loopholes. Ordinary tax cuts have a mixed record on helping the economy; growth after the Bush tax cuts was mediocre, for example. But tax reform could save households and businesses from changing their behavior, often inefficiently, to qualify for tax breaks. The Bowles-Simpson plan suggests several reforms that would raise more tax revenue than today’s code and help close the deficit.”

“Of course, when economists say loopholes, they are including the deduction on home mortgage interest and other popular items. That’s the problem with deficit cutting: it involves painful choices, like the ones you see here and the ones in the Bowles-Simpson plan that led to last week’s outcries.”

“The government has not yet solved the deficit problem, the economist William Gale of the Brookings Institution says, because voters have not yet demanded it. They have rewarded politicians who say they are worried about the budget much more than politicians willing to make specific benefit cuts and tax increases. All of us would prefer generous benefits and low taxes.”

“ ‘Whatever the eventual solution is,’ Mr. Gale said, ‘it will probably be something that is not politically feasible now.’ ”

However, let’s hypothesize that somehow our legislators will be able to reach a compromise in the new Congress, and implement some of the Commission’s proposals. They would be a mixture of spending cuts, including entitlement programs, tax increases, and tax reform. Would we then witness the types of civil unrest we have seen happening in France, Spain, Portugal, and, now, Great Britain?

In my mind, America is too great a country to continue to flounder in this seemingly hopeless morass. History is on our side. We have faced great challenges before and overcome them. Generations of Americans have risen to the challenges we have faced over the centuries, from the Civil War to World War I to World War II, and from the numerous financial panics that have occurred from 1819 until today

It is time to start thinking “outside the box.”

American Society at present is fractured. Disparate elements are at each other’s throats, all claiming that their way is the best way, the only way. What is needed is a unifying force that will bring the Nation back together. What could that be?
The fact is that society reacts best to emergencies—an outside threat to our national security; or an internal threat to civil stability, such as the Great Depression, the civil rights movement with its resulting riots, or the Great Recession that we are now enduring. Do things have to get to the panic stage before the Nation embarks on the proper course?

What America faced after the Depression is analogous to our challenges today. Both the European Union countries and the American right are not heeding the lessons that should have been learned from the experience of the 1930s. When leadership then turned from stimulus to deficit reduction, the Nation was plunged back into economic distress. Are we about to do the same thing now? The only thing that saved us then was World War II. If the only rallying point to unify the Nation is war or extreme civil unrest, what are the practical alternatives?

If one solution is indeed war,what is going to be our next battleground? The answer that David Broder posed in a recent Washington Post op-ed was Iran, and the justification will be that country’s refusal to take the military use of its nuclear capability off the table, and the threat that position poses to Mideast peace and the proliferation of nuclear weapons to terrorist groups. But if the United States is going to engage Iran militarily, it must first exit Iraq and Afghanistan completely. Such an exit would be exceedingly simple to justify, as neither of those allies is living up to a standard of cooperation that encourages our further involvement.

If the triggering mechanism is not war, but civil unrest, it will come in the form of the American middle class taking to the streets in riots over the elimination of safety nets for the vast majority of average citizens, and cutbacks in Social Security and Medicare for our seniors. Would such a reaction prompt the leadership of both political factions to unite?

Here is another question. It has been fifty-eight years since America turned to a military leader, in the person of Dwight D. Eisenhower, to lead the Nation in a time of trouble. Has such a time now returned?