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
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
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.