Politics & Policy

Days of Economic Reckoning

The U.S. and the EU alike are bungling colossally.

As the crunch date on the U.S. deficit and the reckoning with the wobbly edges of the Eurozone rush toward us, once again, the leadership gap yawns cavernously on both sides of the Atlantic. John Boehner and the hobgoblins in the Republican congressional leadership may have managed the almost unimaginable feat of turning the deficit into Obama’s issue, and giving the president back the advantage in next year’s election. In Europe, meanwhile, the EU practice of making solemn statements of the solidity of the crumbling economic union, rather than taking the measures needed to assure that the private banking system survives the defaults that are coming, is bound to increase general agitation.

For good measure, the blundering, trigger-happy American prosecutocracy may have put defendant Strauss-Kahn into the Elysée (the French presidential residence), where he would do wonders for whatever may remain of the most successful alliance in history (NATO).

President Obama’s failure to provide, until the last few weeks, any guidance for how he proposed to deal with $1.5 trillion annual deficits going on into the sunset like Gene Autry singing “Back in the Saddle Again,” has been an astonishing exercise in irresponsibility. Deficits on this scale are practically indistinguishable in their consequences from accretions to the money supply, and constitute the accrual of inflation on a short fuse that is an assault on middle-class financial security and values, which are, in turn, the backbone of the stability and prosperity of any advanced nation. The Republicans appeared, through most of this administration’s life, to grasp that.

It is fairly easily established that successful deficit reduction is four-fifths spending reductions to one-fifth tax increases, and even that formula will not succeed without respectable economic growth. The Republican opposition to income-tax increases on annual incomes above $250,000 is understandable in a more perfect world than this one now is, and I certainly don’t know the details of the intense negotiations between the president and the congressional leadership. Nor is $250,000 for a family of four or more a great cushion of financial ease today; it is only more than most people earn in a year. But that is the political point: Most people don’t consider the president’s position unreasonable if, at the same time, large categories of entitlements are being pared by a Democratic administration and there is some serious talk of a 30 percent cut in the anticipated ten-year deficit.

A $4 trillion reduction (which is what was under consideration) is only about a 30 percent cut in that projection, though it could be more if economic growth revived, and if it emboldened the parties to go farther in the same direction (with the public gasping in relief that its political leaders were finally taking this immense crisis seriously). Unless there is the greatest public-relations reversal since the First Battle of the Marne, Speaker Boehner will take the rap for scuttling the effort. Something will be done to avoid an outright default, but the proverbial “full faith and credit of the United States” is now an automobile that is lurching past the last visible gas station, propelled only by the fumes in an empty tank. This is an unimaginable state of affairs and unless something more than a patch-through for a few months is arranged, the party that appears most recently responsible for this inexcusable mess will pay for it, and Mr. Speaker will have good reason to indulge his propensity for weeping in public.

These are the basic problems. First, Americans are concerned about the deficit, but because no one has explained the proportions of the deficit problem (which is the sort of thing political leaders are supposed to do for a living), they are just as opposed to $4-per-gallon gasoline, sales-tax increases, an increase in the Social Security retirement age, almost any other entitlement curtailments, or anything else that would represent progress against the deficit. The second problem is that Obama has a fixation on the supposedly rich people who make over $250,000 a year per family, and the hydra-headed Republicans seem unable to grasp that if they went for what appeared to be on offer in the $4 trillion deal, they could blame increased income taxation on the so-called rich on the Democrats, and split the credit with the Democrats among the less well-to-do for the compromise itself.

Entitlement economies and some types of sales taxes on discretionary transactions are necessary for deficit reduction, and income-tax reductions are necessary for resumption of economic growth, which is now stalled. There are about 30 million unemployed or seriously under-employed people in the U.S. and it may be advisable to try some sort of workfare, only slightly reminiscent of the New Deal and President Eisenhower’s interstate-highway program. The party leaders are bickering as the chicken game goes on. It isn’t leadership, and Boehner is no match, tactically, for Obama.

In Europe, the basic problems are that the southern countries and, unwittingly, Ireland, all filed false prospectuses on joining the Euro and were bought out of their drachmas, lire, pesetas, escudos, and punts, in inflated quantities of Euros (basically 60 percent deutschmarks, 25 percent francs, and a sprinkling of other currencies); only about 35 percent of Eurozonites work — the rest are on some sort of government benefits; the birthrate has collapsed, and Muslim immigration is part of the problem and not part of the solution. Individual countries will have to apply austere tourniquets, as the French, Greeks, and some others are trying to start to do, and the private-sector banking systems will have to be allowed to average losses or report them incrementally, and be given some equity or back-stopping reinforcement, before the debt maturities and interest rates of the insolvent national issuers are alleviated.

None of this is especially complicated conceptually, though there is always plenty of room for debate on the components of real solutions, in the U.S. and the EU alike. But both are essentially grade-three arithmetic, with the caravan of zeroes required by trillions added.

The ability of American prosecutors to scatter mindless destruction even across oceans arises from their cameo role in international affairs through the DSK affair. It is conceivable that this farce has made DSK more electable than he was. President Sarkozy should be able to see off the politically ill-favored daughters of Jacques Delors (Martine Aubry, for the Socialists) and of Jean-Marie Le Pen (Marine Le Pen, for the National Front), as well as the former couple M. Hollande and Mme. Royal of the Socialists (who separated over her leapfrogging him in the Socialist hierarchy before the last election). But a DSK returning with the badge of honor of his sojourn at Riker’s Island, and his manacled and unshaven command performances in a shabby New York court on a spurious charge, could have a dynamite image-builder. His love of America is unlikely to have been enhanced to Lafayette-Tocqueville proportions by his current sojourn in this country.

People and serious countries have strong instincts to survive, and the assertion of them by the leading nations of the West must be just around the corner.

— Conrad Black is the author of Franklin Delano Roosevelt: Champion of Freedom and Richard M. Nixon: A Life in Full. He can be reached at cbletters@gmail.com.


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