An Opening Salvo to a Fiscal Firebombing
Years of gridlock on Capital Hill, economic stagnation, and increasing amounts of public debt and lingering levels of high unemployment have all worked in conjunction to give the public the sense that America faces a crisis. Whether the public thinks this crisis is economic, fiscal or social is irrelevant, as the beltway has successfully framed America’s problems in fiscal terms. Publications on the left and right argue in favor of ideological solutions to eliminate America’s budget deficit and reduce our obligations to debtors: liberals argue for tax increases, conservatives argue in favor of entitlement reform. The paradigm of debate is shockingly misguided: while America’s rising levels of debt certainly poses a problem, the simplistic fiscal arithmetic proposed by ideologues poses a larger dilemma of a double-dip recession that actually increases our debt rather than a quick fix. By learning from the experiences of European countries facing so-called “debt crises”, a route out of America’s current languid budgetary and fiscal state may be discovered. In doing so, America’s global standing will be dramatically strengthened and China’s ascendance may be stymied.
While the content of the three quotes at the beginning of our proposal appear to share little in common, they form the foundational basis for our policy prescriptions. As Erskine Bowles aptly stated, America global stance is imperiled by fierce competition. The blossoming economies of India, China, Brazil and many others threaten America’s superpower status and its virtual monopoly on technological innovation. The problem is that our nation is currently enslaved to the dead ideas of economists. Instead of introducing a massive fiscal stimulus, according to classic counter-cyclical Keynesian theory, to engender rapid recovery, our nation settled on a minimal fiscal stimulus that was later walked back by spending cuts and sequestration. At the moment, our nation has the ability to accrue mountains of debt: the interest rate for a 10-year bond is currently 1.59%1. While accumulated mountains of debt would be a long-term liability, it would be a present-day asset: dilapidated infrastructure could be repaired, struggling school districts would be able to hire desperately needed teachers, a green technological revolution could transform the global response to climate change and our economy could be put back on track. Ultimately, the economic recovery reaped by our nation’s increased debt load would allow us to pay it off in short order and with little cost: tax revenues would skyrocket without tax increases and discretionary expenditures would plummet as poverty and unemployment decreased. The mountain of fiscal obligations owed to bondholders would appear to be a molehill compared to our surging GDP. With the addition of necessary structural reforms to our economy, we could achieve both material prosperity and a balanced budget sheet. Contrary to the chorus of voices stating that fiscal responsibility requires sacrifice, we say that fiscal responsibility requires following instructions derived from tried and true economic theory.