The Moment of Truth

The United States must economize drastically, and American politicians must prove that they are ready and willing to solve the nation’s problems by doing so. If not now, when?

The poster has become justly famous: “Cut Taxes, Not Defense” was the demand by tea party demonstrators in New York. The sentiment illustrates just what a clouded cuckoo land America’s populist right wing inhabits. But they have only raised to ad absurdum heights a concept that has dominated American policy for decades — namely, that tax cuts can produce so much economic growth that even ever-increasing military expenditures can be financed.

It took a financial crisis to show just how completely wrong that theory was. After countless tax cuts, the American economy is in such a disastrous state that the United States will be facing a deep financial crisis by the end of the decade. By 2030, the mountain of debt will proportionally exceed that of Greece. The historic irony lies in the fact that American voters are now punishing a president who only inherited the whole problem, while they reward those Republicans that led their country into the crisis in the first place. But Obama now has a weapon with which he can determine his country’s destiny as well as his own. His bipartisan debt commission came up with a blueprint that would cut the deficit by $4 billion by the end of the decade.

Breaking Everyone’s Taboos

The significance of the 66-page commission’s report for American policy can hardly be exaggerated. The study lays out a blueprint against which politicians have to measure themselves: If you reject X, Y and Z, how do you intend to balance the budget? The commission broke everyone’s political taboos. Outlays for Social Security will have to be reduced, which raises objections from liberals. Retirement age should rise to 68 by the year 2050, and proceeds will be redistributed from the middle class to the poor — a nuisance for voters of all parties. The defense budget will be reduced, and the gasoline tax raised significantly, much to the horror of conservatives. Capital gains taxes will rise, many tax deductions will be done away with, and the deduction for home mortgage interest will be limited. The decades-long practice of subsidizing both government and private borrowing will cease.

It is truly America’s “moment of truth” as the title of the report indicates. The commission co-chairs, Erskine Bowles, former President Clinton’s Chief of Staff, and retired Republican Senator Alan Simpson, put one over on Washington’s business-as-usual crowd by releasing their proposed solutions in advance, making it difficult for anyone to try avoiding a debate on economizing. Here’s where Obama has an enormous chance. He can adopt the recommendations and force the Republicans to propose compromises. If they refuse, they’ve provided him with his campaign theme for 2012.

A Constant Source of Instability

To understand the global dimension of the report, it’s necessary to go back into history. Since the collapse of the monetary system in the post-war period after 1971, the U.S. federal budget and balance of payments have consistently been in red ink. From then on, the dollar became a constant source of instability. The deficit’s rise accelerated after President Reagan’s tax cuts in 1981. The hope, nourished by economist Arthur Laffer, that economic growth would eventually close the deficit gap never materialized. President Bill Clinton was the first to produce budget surpluses for three years, which he accomplished by increasing taxes and cutting spending.

The parade into financial crisis began with George W. Bush. He cut taxes, fought two wars and increased social spending. Budget surpluses rapidly turned into staggering deficits. In the financial crisis, they spun completely out of control. Because more than half of all American securities are held by foreign countries (China alone owns 22 percent), the deficit has become a security risk of the highest magnitude. What would happen if, for any reason, financial markets lose confidence in the United States? Here, the euro crisis provides abundant examples for American politicians.

People can no longer close their eyes to the truth. That’s exactly the significance of the debt commission’s report. According to it, eliminating the deficit will be accomplished by cutting spending by 75 percent and raising taxes only by 25 percent. A more balanced ratio would probably have been better, but there is basically no alternative to the commission’s recommendations. Obama will have to improve his political management abilities considerably if he wants to take advantage of this opportunity.

He must learn to fight and also make compromises at the same time. He has to jettison the approximate and the ephemeral in his speeches and tell the people exactly what he wants. It has to do with more than the current deficit. That is driven by the acute crisis and won’t be reduced very rapidly, lest the economy be further damaged. But his plan has to be clear. American politicians must prove that they are ready and willing to solve the nation’s problems. If not now, when?