Friday, November 30, 2012
America's fiscal policy faces an apparent Hobson's choice.
On the one hand, we need to tame federal deficit spending by imposing new across-the-board spending cuts and higher taxes. We are told that if we do not act on this soon, the debt markets will choke on the overabundance of government debt issued to fund those deficits, causing interest rates to climb. As a result, businesses and homeowners will be unable to borrow on reasonable terms, which will lead to a slowdown of the economy.
On the other hand, we also are told that allowing this deficit reduction program actually to take effect in 2013 would precipitate a new recession.
Faced with two genuinely unpalatable courses of action, it's no wonder that Washington struggles to find a consensus. But, the dilemma is more apparent than real, because it confounds the dimension of time.
What we need to do is to commit today to a transition -- a ramp -- from our current taxing and spending policies to a more sustainable mix. A firm congressional commitment, for example, to a three-year ramp, by means of which we move to a sensible combination of higher taxes and lower spending, should enable the economy to heal while reassuring markets that the long-term fiscal health of the country will be restored.
Of course, advocating a three-year transition from where we are to where we need to be is the easy part. The real challenge is to identify the new policies.A bona fide "grand bargain" might need to encompass as much as $8 trillion in lower spending and higher taxes over 10 years to address fully the underlying fiscal trends, not the much smaller numbers currently bandied about.