Sadly, “We’re broke” may impress the poor but it won’t impress the bond market and foreign lenders. For the time being, they’ll keep purchasing US government bonds whether US politicians cry poor or not. The US budget deficit is a political crisis, not a fiscal crisis. America’s politicians simply aren’t ready yet to take feasible actions to address it.
Unlike Greece, Iceland and Ireland, America’s economy and its people are generating enough money to pay their way and maintain their enviable standard of living. The structural deficit—a gap in revenues and spending that persists even when the economy is operating at full potential—has been solved on paper by several technically credible strategies. The president’s own debt commission provided a complete package that emphasized long-term restraint in entitlements and modest tax increase. Implementing everything at once would probably create a recession but that isn’t necessary.
The credit markets recognize that the US economy has ample capacity to carry a sustainable nation budget. Furthermore, recent history also confirms that it can chose leaders—and re-elect leaders—who loathe waste but can raise taxes. Reagan, the Bushes and Bill Clinton all said the era of big government was over. All increased spending and, reluctantly, all but one raised taxes.
The Financial Times commented:
“Nor does either political party wish to air another economic reality, that America’s tax burden as a proportion of national income is currently a low 24 per cent, according to Credit Suisse. This is 2 percentage points below the 50-year average and 4 percentage points below the late-1990s peak. Under Mr. Obama’s proposed budget only a quarter of the planned deficit reduction comes from tax rises. Republicans no doubt think even this is unreasonable. But the truth is there is still capacity for taxes to take more of the strain.”
America, thank goodness, doesn’t need saints for leaders. It may be badly managed. But mere mortals can learn to be better managers.