No Thanks for the Political Class
12:00 AM, Nov 26, 2011 • By IRWIN M. STELZER
Greece and Italy may be ungovernable, but America is ungoverned. The president ducked out of the country for an Asian tour while the supercommittee tried to reach agreement on a plan to cut the deficit. But the Democrats refused to offer specific cuts in entitlement spending, despite a Republican agreement to modifications of the tax code that would produce billions in new revenue, most of it by withdrawing from the wealthy various opportunities to use special provisions to reduce their tax burden. This increase in tax receipts, largely from the rich, did not satisfy the Democrats’ insistence on a $1 trillion increase, to come from higher tax rates on “the rich.” It might take a sharp reaction from the market to force the politicians to veer off the road to ruin on which they are taking the country.
This stalemate suits the president, whose campaign strategy is to blame the Republican Congress for refusing to raise tax rates of “millionaires and billionaires.” The failure of the supercommittee to agree will trigger spending cuts of $1.2 trillion over the next decade, starting in 2013, absent some change in the law. The largest will fall on the military, reducing it to something like its pre-World War II level of effectiveness, according to Leon Panetta, Obama’s defense secretary. The president, who has always wanted to cut the U.S. defense establishment down to size and rely more on international organizations to implement U.S. foreign policy, is undoubtedly unperturbed at the prospect. Only a threat by Panetta to resign might force the president to allow a change in the law, but such a surrender of power and perks is not fashionable these days.
With the president having foresworn governing in favor of campaigning, and members of Congress paralyzed by ideological differences and obsessed with their reelection chances, the absence of legislators and lobbyists this Thanksgiving weekend—they are among the estimated 42.5 million Americans who took to the cars, trains, and planes—left the government no less a force than it will be when they return on Monday. And return they will: A visit to constituents is one thing, remaining permanently among them quite another. There is no Cincinnatus in this crowd.
In the end, the failure of the supercommittee would not matter if the effect of that failure were limited to its direct economic consequences. The economy was growing sluggishly before the supercommittee met, and is growing at a relatively slow annual rate of 2 percent now. Unemployment was high then, and remains high now. Interest rates were low then, and remain low now. The housing market was in a shambles before the blame game now being played, and is no less in a shambles now.
But we live in a world in which markets are calling the tune, and worry about governance as well as the usual indicators of solvency drive the borrowing costs of sovereign states. Robert Zoellick, the insightful head of the World Bank, writes, “since August you’re starting to see markets make judgments about governance.” That’s why interest rates on the bonds of Italy and Greece, and by extension Spain, have been rising, while Britain, its deficit as high and its economy hovering between zero growth and recession, has been able to sell its gilts at low rates. It is deemed governable, something investors are not sure is the case of Greece, Italy, and Spain, each with untested governments that have recently been selected (in Greece and Italy) or elected (in Spain).
That leaves America as the best house in a bad neighborhood—running a large deficit, our total debt burden rising, our politicians at swords drawn, our president AWOL. But still benefiting from the rule of law, and protesters who prefer to camp out and shoot up rather than burn down shops and businesses. Oh yes, like Britain, America has its own currency and its very own printing presses, so it will never default in the sense of not repaying its debts. True, if Americans and their elected representatives persist in refusing to cut spending and raise taxes, and simply print money to cover our deficits, the value of the dollars the lenders will get in return for their loans will fall, prompting them to demand growth-stifling higher interest rates. But that is not likely to happen before the November elections, whereas any effort by politicians to cut entitlements or raise taxes would be known before voters make their choices.