S&P Report: A Moderate’s Manifesto
I have no idea if a math error is to explain S&P’s decision to downgrade the US government credit rating. And I’m quite aware of S&P’s dubious record in helping to create the very credit bubble that got us into this mess; remember those “AAA” bonds insured by credit default swaps?
But I think, as Ezra Klein argues, this downgrade is real and is justifiable.
But I think this is more than just an assignment of blame on our broken political process and unwillingness to deal with the debt crisis seriously. I see it as a manifesto for moderate politics of the sort that will get our fiscal house in order and grow the economy again.
The non-moderate way to look at the debt crisis is to focus on only one side of the politico-fiscal ledger. Liberals say there aren’t enough taxes and there is too much defense spending. Conservatives say there is too much entitlement spending and that tax increases on the rich will do virtually nothing to lower the debt (and will stifle private investment).
The moderate accepts the basic truth of both sides here
Entitlements have not only grown, but will expand enormously as Baby Boomers face retirement.
Defense spending, after falling during the Peace Dividend days of the 1990s, was ratcheted back up again in the post-9/11 era to fight two long, draining wars that serve little national interest.
Taxes, which were raised in the early 1990s by Bush I and Clinton, were irresponsibly lowered during the early Bush II years, contributing more to the debt than any other single item. Refusal of Republicans to raise them – and Democratic cowardice to press the point – is at the heart of the debate.
But Democrats – including moderate Democrats – must accept the fact that if the Bush tax cuts are going to be repealed, they must not be limited to the wealthy. In fact, most of the tax cuts from 2001 and 2003 went to those making less than $250,000 a year. Coupled with various child tax credits, the middle class ends up paying virtually nothing in Federal income taxes. Yes, there are other tax burdens the middle class must shoulder – payroll taxes, state and local taxes, etc. – but the virtual zeroing out of Federal income taxes from the middle class was every bit as irresponsible as cutting taxes on the wealthy. And, yes, any tax increase will negatively affect consumer spending and business investment. But the alternative is more delusion, making decisions far harder in the future.
Finally, there is the matter of our political system itself. One of the elements cited in the report is clear on this: “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”
It doesn’t take a rocket scientist to figure out who was playing “brinksmanship” in the recent debt ceiling debate. The Tea Party, far from bringing sanity and solution to our national debt woes, has only made things worse. They have utterly refused any tax increases, which the report says is necessary to any solution, and have shown utter reckless disregard for global market considerations of short-term political action.
But the left, while far weaker in this debate than the Tea Party right, was able to hold its line on entitlements. And that is just as much a part of the problem. Social Security and Medicare were created at a time when life expectancies were much lower than today. The cuts and reforms don’t have to hit the folks coming into retirement right now. But for those in their late 40s and younger, there should be an expectation that retirement benefits (health care and Social Security) will not come into effect until at least the age of 67, if not 70. Those are the sorts of concessions the left must make, and they were as far from the recent debt deal as were responsible tax increases.
The answer to our debt woes will not come from the current crop of politicians in Washington. The right wing of the Republican Party is flagrantly irresponsible, both in method and in goal. The recent debate sapped much public support for the Tea Party; one can only hope that continues.
But Democrats – Obama especially – must give up the fiction that we can raise taxes on the wealthy alone. If Obama is going to be the transformational leader he promised in 2008, he has one more chance to deliver: call for a true grand bargain that raises taxes across the board and cuts spending across the board. Start with the Simpson-Bowles commission report if necessary. But stop shirking on this in hopes the Tea Party right will implode in a fit of arrogance and ignorance. Leadership is necessary to steer the course back to the center; inertia will not do it.
A grand bargain on tax increases would let ALL of Bush’s tax cuts expire, including those for the middle class. Anything short of this would be grossly insufficient.
On entitlement reform, the Republicans will have to give up their voucher fantasies – Medicare’s single payer is far more efficient and cheaper than what Paul Ryan offered – and then Democrats will have to accept real but incremental changes in the retirement age.
Ironically enough, both parties may agree on defense cuts, as there is little stomach left in either party for more military spending or adventures.
The big question, then, is the current economy itself. A major – perhaps THE major – driver of the deficit’s growth since Obama took office was not the stimulus bill. It was lost revenue in the recession. No debt measure will work if it doesn’t boost the economy.
Neither Keynesian nor supply-side solutions will work at this time. Nor can quantitative easing. All will aggravate the debt situation.
Sadly, the only answer is time. The business cycle must run its course. Housing prices must bottom out. Consumers must finish the de-leveraging process and pay off their personal debts.
But if we build in the other structural changes to the way we fund and benefit from our government – higher taxes and lower entitlement spending – then we can make the other kinds of private and public investments – including education and infrastructure – that will form the basis for real, long-term growth. There is no free lunch. But a modestly priced lunch – offered by moderates – may be the best deal for all Americans.