One Financial Crisis after Another

In the months of debate and speculation over the looming “fiscal cliff,” we heard from economics and policy experts from across the ideological spectrum who explained the dire short- and long-term consequences that our nation would face if our national leaders failed once again to come up with a meaningful solution to our fiscal woes.

With economists predicting large decreases in GDP, more job losses, and other negative impacts on our already fragile economy, I had some hope that maybe the politicians in Washington would finally stop kicking the can down the road and make some tough choices to improve the economic outlook for millions of hard-working Americans. In other words, I hoped they would show some real leadership.

As we all now know, it turns out that hope was misplaced.

By focusing on the fiscal cliff drama, we (and our so-called leaders) took our eyes off of the big picture. The handwringing and deal-making surrounding the fiscal cliff was only about devising a jerry-rigged deal to avert scheduled tax hikes and the automatic spending cuts (the oft-referred to “sequestration”) called for in the Budget Control Act of 2011 (BCA) should the Joint Select Committee on Deficit Reduction (aka the “super committee”) established by the BCA fail to devise a plan that would reduce the deficit by $1.2 trillion over 10 years. When the super committee announced in late 2011 that it was unable to reach an agreement, the clock began ticking on a series of automatic discretionary spending cuts (totaling $1.2 trillion over 10 years) that would begin Jan. 2, 2013.

While the failure to reach a deal would have surely meant increased short-term economic hardship for many Americans, Congress and the president should have put aside partisan squabbling and their usual myopic approach to dealing with budgets and deficits and used this opportunity to enact real, sensible reforms that would have stabilized the long-term economic outlook of our country. Instead, they reached a lame compromise that, although it “blocked most [of the] impending tax increases and postponed spending cuts largely by raising taxes on upper-income Americans,” it “left a host of issues unresolved and guaranteed continued budget clashes between the parties.”

The media of course played a major role in the shaping of the fiscal cliff drama, and focused an inordinate amount of coverage on the administration’s proposals to increase revenue by raising taxes on the wealthiest Americans. Counter proposals for much-needed spending cuts were rarely, if ever part of the reporting. The result was a meaningless “solution,” a symbolic win for the middle class and the president. In my opinion, the fiscal cliff “solution” is similar to heating a house with the windows open and getting more money for oil instead of closing the windows.

Many, many observers expressed similar disappointment in this latest failure of our Congress and president. Immediately after news that a deal had been reached to avert the fiscal cliff, Erskine Bowles and Alan Simpson (co-chairs of the National Commission on Fiscal Responsibility and Reform and founders of the Campaign to Fix the Debt) released a statement that lambasted the president and leaders in Congress for the deal, calling it “truly a missed opportunity to do something big to reduce our long term fiscal problems.” Despite knowing for more than a year that the fiscal cliff was coming, Washington “missed this magic moment to do something big to reduce the deficit, reform our tax code, and fix our entitlement programs.” Despite creating the fiscal cliff in the first place to force their own hands at reform, and taking the country to the brink of economic disaster, “Washington still could not forge a common sense bipartisan consensus on a plan that stabilizes the debt.” Bowles and Simpson called on leaders in Washington to have the courage “to make the far more difficult reforms that bring spending further under control, make our entitlement programs sustainable and solvent, and reform our tax code to both promote growth and produce revenue.”

The sad fact, of course, is that this latest deal doesn’t really solve anything at all. It merely defers some of America's toughest spending problems (such as “the ballooning cost of health care”) for another two months, when “the delayed $110 billion in spending cuts will again kick in. At the same time, the U.S. will face the need to increase its borrowing limit, a change that can only be made by Congress. That sets up another rancorous fight, one with potentially more damaging consequences.”

In its critique of President Obama's fiscal cliff solution, the National Commission on Fiscal Responsibility and Reform noted its members had urged the president and Congress to come to a bipartisan consensus around several common-sense reforms, and critiqued the administration for repeatedly ignoring its recommendations. President Obama has repeatedly used the term “common sense” when describing his preferred approach to new gun-control legislation. Why is the president unwilling to apply that same approach when dealing with our nation’s financial problems?

At this point, it is probably unreasonable to expect that in two month’s time our leaders will finally behave like adults and devise a sensible, managed approach to deficit reduction that reduces spending across the board, reforms and simplifies the tax code, and lowers tax rates (including corporate tax rates). We are running out of time for this to happen. At some point, our deficit will truly trigger a financial disaster. Many economists have warned that this will not be a slowly unfolding series of events. It may well be swift and sudden, and we won’t be able to borrow our way out of it. Financial advisor John Mauldin notes that when a country’s total debt grows out of control, servicing that debt becomes an issue — “lenders first ask for more collateral or higher interest and then, if the debt is not brought under control, they stop lending. For a nation, its bond market simply collapses.”

If a nation cannot get its debt and deficit under control, “it will lose access to the bond market at reasonable rates. There have been no exceptions. There is a point at which the bond market begins to worry about the ability of a nation to repay its debt with a currency that is now worth less than when the money was lent, and then interest rates begin to climb,” says Mauldin. As the deficit grows, and the economy slows, interest rates may start to rise, making it even harder to balance the budget. If this happens, says Mauldin, “perhaps Congress will be forced to do something. But at that point, it will be time for higher taxes and deeper cuts than any of us can now imagine. The longer things go on as they are, the worse the final result and restructuring will be.”

We cannot afford to let things get to that point. The biggest obstacle to solving the current deficit problem is that President Obama does not see it as a problem. He views the increasing spending as “investment” in his view of America. The first part of solving a problem is acknowledging the problem exists.

The failure of our nation’s leadership to deal with our debt crisis is unacceptable. We need a solution that grows the economy but doesn’t increase spending. We need to increase the tax base without increasing the budget. It is time to put a stop to this reckless disregard for our children’s and grandchildren’s financial future. It’s time for our leaders to stop acting like fiscally irresponsible children and start acting like sensible adults.