America has no choice but to enter its own age of austerity
Mort Zuckerman
Mort Zuckerman
July 14, 2011
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The American public gets it, even if successive US administrations have not. There are over 12m families who get it particularly well: they are those who owe more on their mortgage than their homes are worth. They know we have been running on empty for years, and that a new era of American austerity is the only way to put things right.
No wonder this is being called the most predictable crisis in US history. For who could dispute, when our government must borrow $4.5bn a day just to keep going, that our national debt is now an existential threat? Wimpy, a character in the cartoon Popeye, got our attitude right: “I’ll gladly pay you Tuesday for a hamburger today”.
Knowledgeable people in finance are aware that the Federal Reserve has been buying 70 per cent of all new Treasury paper, making the government by far the largest client of its own debt. This is possible only by increasing the money supply and the balance sheet of the Fed itself, a practice that sooner or later must blow up.
That’s not the only risk: economists Carmen Reinhart and Kenneth Rogoff have shown that economic growth deteriorates as total government debt exceeds 90 per cent of gross domestic product. America is already in that range. Indeed, the real facts are even worse, for we are also now in the midst of the familiar Washington game of kidding ourselves about the size of the deficit. It is already at $1,645bn for the next fiscal year. The Congressional Budget Office concludes that President Barack Obama’s most recent budget underestimates spending while also overestimates revenues.
But for now politics as usual predominates. The Republicans, elected to reduce debt, are struggling to find good reasons to raise the limit. To avoid humiliation in front of their constituents they feel they must secure unprecedented cuts. Tapping into America’s gut sense that getting out of debt means cutting up your credit cards, House Speaker John Boehner feels he is on solid ground insisting on cuts but no tax increases in any deal.
Mr Obama’s initial response was just as divisive, attempting to play-off the rest of America against cruel Republicans and the wealthy. Yet his harsh tone then made a rational bipartisan agreement more difficult. And any deal must be bipartisan, so neither party can blame the other for necessarily unpopular action. Both must therefore make concessions.
Yet cuts and tax rises remains politically treacherous. Senior citizens, in particular, will vote against any changes to healthcare and retirement programmes. Both parties hope to keep their bases on side, while seeking support from those independent voters – who are focused on fiscal probity and represent 29 per cent of the electorate – whose views will be crucial during the next year’s presidential election.
In truth there is no politically viable way to raise sufficient taxes to solve our deficit problem. Given this, the only serious way forward is through long-term spending reductions, especially in entitlement programmes. But the Democrats are in hock to the unions, and refuse to cut the two programmes that dominate the nation’s long-term balance sheet, Social Security and Medicare. Most conservatives, meanwhile, won’t touch spending on their own pet programmes, not least defence and farm subsidies.
Given we can’t raise taxes enough to cover the scale of our deficit problem, America now has no choice but to enter our own age of austerity, namely long-term spending reductions. Britain has gone down this path, and is managing well. There have been protests, but their government has held fast – because it understands, as we must, that the scale of deficits and debt demands nothing less.
This is a new world for America, and one requiring firm new policies. Yet, to date, we become only more politically dysfunctional. Mr Obama is in delicate position. He can’t let the country default on his watch, but risks just that if he insists on tax hikes Republicans can’t stomach. Nor, except in vague terms, has he offered adequate spending cuts of his own. His talk of $1,000bn in cuts seems large, but in truth it is nowhere near enough to change the trajectory of our debt.
There was a brief moment when most of us thought a large scale deal was possible, providing $4,000bn of deficit reductions over the next decade. No longer: now all we have is a smaller $2,000bn package on the table. Even then both parties now worry that short-term cuts might harm America’s faltering growth, extend the recession and reduce tax revenues – and therefore increase the federal deficit.
The best that can be said is that both parties are now talking about constraints on spending, rather than new programmes, and of increasing revenues not by tax increases but through the elimination of special tax allowances. It may even be beginning to dawn on both sides that they are arguing in the path of an avalanche. Just think: in the few minutes that it took you to read this column, the US national debt went up by over $6m. It will take more than a short-term deal to put that right.
.
The writer is editor-in-chief of US News & World Report and chairman, chief executive and co-founder of Boston Properties, a leading US real estate group.
The American public gets it, even if successive US administrations have not. There are over 12m families who get it particularly well: they are those who owe more on their mortgage than their homes are worth. They know we have been running on empty for years, and that a new era of American austerity is the only way to put things right.
No wonder this is being called the most predictable crisis in US history. For who could dispute, when our government must borrow $4.5bn a day just to keep going, that our national debt is now an existential threat? Wimpy, a character in the cartoon Popeye, got our attitude right: “I’ll gladly pay you Tuesday for a hamburger today”.
Knowledgeable people in finance are aware that the Federal Reserve has been buying 70 per cent of all new Treasury paper, making the government by far the largest client of its own debt. This is possible only by increasing the money supply and the balance sheet of the Fed itself, a practice that sooner or later must blow up.
That’s not the only risk: economists Carmen Reinhart and Kenneth Rogoff have shown that economic growth deteriorates as total government debt exceeds 90 per cent of gross domestic product. America is already in that range. Indeed, the real facts are even worse, for we are also now in the midst of the familiar Washington game of kidding ourselves about the size of the deficit. It is already at $1,645bn for the next fiscal year. The Congressional Budget Office concludes that President Barack Obama’s most recent budget underestimates spending while also overestimates revenues.
But for now politics as usual predominates. The Republicans, elected to reduce debt, are struggling to find good reasons to raise the limit. To avoid humiliation in front of their constituents they feel they must secure unprecedented cuts. Tapping into America’s gut sense that getting out of debt means cutting up your credit cards, House Speaker John Boehner feels he is on solid ground insisting on cuts but no tax increases in any deal.
Mr Obama’s initial response was just as divisive, attempting to play-off the rest of America against cruel Republicans and the wealthy. Yet his harsh tone then made a rational bipartisan agreement more difficult. And any deal must be bipartisan, so neither party can blame the other for necessarily unpopular action. Both must therefore make concessions.
Yet cuts and tax rises remains politically treacherous. Senior citizens, in particular, will vote against any changes to healthcare and retirement programmes. Both parties hope to keep their bases on side, while seeking support from those independent voters – who are focused on fiscal probity and represent 29 per cent of the electorate – whose views will be crucial during the next year’s presidential election.
In truth there is no politically viable way to raise sufficient taxes to solve our deficit problem. Given this, the only serious way forward is through long-term spending reductions, especially in entitlement programmes. But the Democrats are in hock to the unions, and refuse to cut the two programmes that dominate the nation’s long-term balance sheet, Social Security and Medicare. Most conservatives, meanwhile, won’t touch spending on their own pet programmes, not least defence and farm subsidies.
Given we can’t raise taxes enough to cover the scale of our deficit problem, America now has no choice but to enter our own age of austerity, namely long-term spending reductions. Britain has gone down this path, and is managing well. There have been protests, but their government has held fast – because it understands, as we must, that the scale of deficits and debt demands nothing less.
This is a new world for America, and one requiring firm new policies. Yet, to date, we become only more politically dysfunctional. Mr Obama is in delicate position. He can’t let the country default on his watch, but risks just that if he insists on tax hikes Republicans can’t stomach. Nor, except in vague terms, has he offered adequate spending cuts of his own. His talk of $1,000bn in cuts seems large, but in truth it is nowhere near enough to change the trajectory of our debt.
There was a brief moment when most of us thought a large scale deal was possible, providing $4,000bn of deficit reductions over the next decade. No longer: now all we have is a smaller $2,000bn package on the table. Even then both parties now worry that short-term cuts might harm America’s faltering growth, extend the recession and reduce tax revenues – and therefore increase the federal deficit.
The best that can be said is that both parties are now talking about constraints on spending, rather than new programmes, and of increasing revenues not by tax increases but through the elimination of special tax allowances. It may even be beginning to dawn on both sides that they are arguing in the path of an avalanche. Just think: in the few minutes that it took you to read this column, the US national debt went up by over $6m. It will take more than a short-term deal to put that right.
.
The writer is editor-in-chief of US News & World Report and chairman, chief executive and co-founder of Boston Properties, a leading US real estate group.
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