The deficit supercommittee tasked with finding $1.2 trillion in budget savings in the next decade has just one week to meet its congressionally mandated deadline of Nov. 23, but any deal reached is unlikely to solve America’s economic problems.
Today’s Wall Street Journal reports that supercommittee members are resorting to accounting tricks rather than making the sort of structural changes that will have an impact on the national debt.
And this should come as no surprise. For one thing, we are now in full campaign mode, and each party is massaging its own formula for forging a coalition of its core constituency plus independents. For that reason, Democrats will be loathe to cut domestic spending or fundamentally alter Medicare and other entitlement programs, preferring tax hikes and defense cuts; they will woo independents by portraying Republicans as beholden to the wealthiest Americans because of a refusal to increase taxes. The GOP for its part will hold the line at its recent proposal to raise $250 billion in tax revenues, looking instead for close to a trillion dollars in cuts to the areas Democrats hold sacred.
Bob Rodriguez, CEO of First Pacific Advisors, was correct when he told AdvisorOne in a February interview that absent structural reforms undertaken this year, a new financial meltdown will likely befall us in a few years. He said at the time: “We need significant fundamental reductions in expenditures at the federal level this year because they’re not going to happen in 2012, which is an election year. If not, by 2013 we’ll be sitting on more than $17 trillion in debt. Therefore, the window to start reform is only about seven months.”
Aside from the political reasons for the absence of structural reform, there is a deeper cultural reason. Western society is not what it once was. Take a look at Europe, with whom we share a civilization, for a clue. The list of Eurozone countries experiencing extreme economic distress now includes at least seven countries. The spread of debt woes from the original five PIIGS – Portugal, Italy, Ireland, Greece and Spain – to Belgium and France should increase worries about financial contagion.
But it shows something else, too, which has relevance to our own problems. And that is that there is a seeming inability to take on any kind of real economic reform until we are compelled to do so through the actions of bond vigilantes.
These investors refuse to lend to deadbeat countries for anything less than a rate of return that won’t destroy that country’s economy. A bond investor won’t take the risk of a two-year Portuguese bond for anything less than 17% today; he thereby risks his capital for the hope of a juicy return, together with the expectation, or hope, that the Eurozone and its financial stability fund won’t let little Portugal fail.
What all this means is that, barring some kind of clear message from voters next fall, the U.S. is unlikely to change unless the bond market forces it to do so. But as we can see from the European example, changes undertaken at gunpoint don’t occur without severe economic wounds. Harsh austerity measures merely weaken an economy while it’s already down. Just look at Greece and Ireland.
Both the Tea Party and Occupy Wall Street movements reveal a deep lack of faith in American institutions: a lack of faith in the markets, a lack of faith in government. It will take far more than economic reforms and political fixes to set America back on track. It will require a renewal of traditional cultural norms of responsibility, what the German sociologist Max Weber a century ago called “the Protestant ethic.”
You don’t have to be Protestant of course to value frugality, hard work and thrift. Indeed, immigrants from Asia, Latin America and other places often exhibit these qualities more than the native population. Until we fix the values problem underlying our economic problems, we shouldn’t expect a lasting recovery.