The epic global leadership fail
I’m very excited to announce that Wonkblog will be republishing Pulitzer-prize winner Steve Pearlstein’s Sunday Business column. Steve has long been an inspiration for my work and, more recently, a mentor to me, and I couldn’t be prouder to be showcasing his pieces. Here’s the first. — Ezra.
The global financial system teeters on the edge of collapse because European politicians refused to tell citizens of their crumbling economies that they could no longer guarantee them “la dolce vita” - the sweet life - they had come to expect.
Top executives at Olympus, one of Japan’s leading companies, resign in shame after acknowledging that for nearly 20 years they used a complex accounting scheme to hide billions of dollars in speculative trading losses.
A revered coach and a respected president at Penn State are fired because they were more concerned about protecting their own reputations, and that of their school, than protecting young boys from an alleged sexual predator.
And a former governor, senator and head of Goldman Sachs resigns as chief executive of MF Global after bankrupting the broker-dealer with overleveraged bets on European sovereign bonds.
Welcome to this week’s exciting episode of “Failures in Leadership.”
Leadership is difficult to define but easy to notice when it’s gone missing. Surely any definition of leadership includes the instinct for seeing the big picture, the ability to get people to acknowledge unpleasant reality, and the willingness to take the personal risks necessary to secure the common good. By that definition, the world would appear to be suffering from a profound leadership deficit.
In hindsight, it seems perfectly obvious what should have been done in each of these instances. Everyone knows it’s crazy to play Russian roulette with the nation’s economy or a company, university or industry. Except that they did.
“At the time, it seemed like we didn’t have a choice,” says the Demi Moore character in “Margin Call,” a new movie about the recent financial crisis, as she recalled her firm’s fateful decision to disregard warnings about a mortgage market crash.
“It always does,” replies the Stanley Tucci character.
I’m guessing that’s how it seemed at the time to the political leaders of Greece and Italy, who couldn’t imagine a world wherepublic employees couldn’t retire at 55. Or the top brass at Olympus, who couldn’t imagine the shame of reporting huge trading losses. Or coach Joe Paterno, who couldn’t imagine allowing a moral stain on his stellar record. Or Jon Corzine, who couldn’t imagine clients would mind his using their money for just a short while to keep the firm afloat. They each had a choice, and they made the wrong one.
To politicians in Washington, it now seems they have no choice but to stick with their party as one more blue-ribbon panel -- the congressional “supercommittee” -- tries to come up with a bipartisan compromise to rein in the runaway federal budget deficit.
For reasons that have mostly to do with ideology and political gamesmanship rather than economics, Republicans have been insisting on a plan that relies solely on cutting spending on domestic programs and entitlements. They offer Americans the promise of growing our way out of the economic hole we now find ourselves in simply by repealing regulations and lavishing more tax cuts on corporations and those heroic “job creators” in the million-dollar bracket.
What you’ll notice if you listen to Republicans describing their plans is that they involve no pain for anyone except overcompensated, underperforming government workers and the undeserving poor.
Among the Republican presidential candidates, the race to wipe out entire government departments has become so intense that one of them couldn’t even remember all the ones he plans to ax.
Do those who propose to eliminate the Commerce Department plan to do away with the Census Bureau and the National Weather Service? If there are no federal funds flowing to local school districts from the Education Department, does that mean Republicans are in favor of raising state and local taxes to make up for the lost revenue?
Of course, these bold proposals are nothing more than political talking points meant to satisfy the mad hatters at the Republican tea party, not serious proposals by serious leaders. As Republicans see it, there is no need to talk about shared sacrifice because there’s no need for sacrifice. Just give them the chance to spread a little free-market fairy dust and America will magically be back on top again, where God had meant her to be all along.
As a group, Democrats have been better only by comparison. They offer their own version of painless budget solutions that they’d have you believe puts all the burden on millionaires and oil companies. They pander to the elderly by telling them there is no problem with Social Security that can’t be solved with higher payroll taxes on the rich, and no problem with Medicare that can’t be solved by government price controls on hospitals and prescription drugs.
They pander to the middle class by promising to lower their taxes, make college more affordable and use the words “middle class” in every third sentence. Although Democrats think more infrastructure investment is vital, it’s apparently not vital enough to warrant a modest increase in fuel taxes to pay for it.
Along these lines, a special shout-out goes to the AARP, the seniors lobby, which has been busy with a TV campaign threatening both parties with political retribution if they dare to slow the growth in spending for Medicare and Social Security. The ads feature a seemingly kindly gentleman who summons up indignation as he declares that seniors won’t stand for being denied the programs they’ve already paid for. Too bad it’s not true: They take out more than they put in to either system.
The ads also are based on the false premise that if we slow the runaway growth in Medicare spending to something closer to the growth in national income, seniors will be denied the care they need. Along with most everyone else in America, seniors are getting hundreds of billions of dollars worth of unnecessary care, or the wrong care, which can be eliminated with no harm to anyone other than doctors, hospitals and drug companies. Failing to slow the growth in health-care spending won’t just bankrupt Medicare - it will bankrupt the country.
Just like the Greeks and Italians, just like the Olympus executives, just like the folks at Penn State and MF Global, the United States is at that “profile in courage” moment when our leaders have to be willing to risk their careers in order to prevent a disaster. Whatever downsides there might be from raising taxes on small-business owners or asking seniors to wait another year for Medicare or eliminating tax breaks for oil companies, you can be sure that all of them would be better off with those than the financial calamity that is otherwise sure to befall us.
President Obama and Speaker Boehner have demonstrated they are ready to embrace such a compromise, and the latest Democratic and Republican proposals leaked from the supercommittee are hopeful signs that others may join them. If it happens, my guess is that it would unfold something like this: The final deal will be struck among three Democrats (Sens. Kerry and Baucus and Rep. Van Hollen) and four Republicans (Sens. Toomey and Portman, Reps. Camp and Upton) - the bare majority necessary to trigger an up or down vote on the plan in both the House and Senate.
The deal will involve between $650 billion and $750 billion in additional revenue over the next 10 years as part of a sweeping reform of the tax code that will get the top rates for individuals and corporations below 30 percent. There will be about $1.5 trillion in spending cuts, at least half from entitlement programs, plus savings from foregone interest payments. To provide an immediate boost to the economy, an earmark-free $100 billion public works bill will be tacked on for good measure.
Total debt reduction: about $2.5 trillion.
First stop will be the Senate, where a bipartisan group of 45 has committed itself to voting for such a package, where the bill will be managed not by Majority Leader Reid but by No. 2 Democrat Durbin. Schumer Democrats and DeMint Republicans will rail against it. In the end, both Reid and Republican Leader McConnell will seize the historical moment and vote aye.
In the House, Boehner will break from his own caucus and, with a hundred other Republicans, vote for the plan, along with an even greater number of Democrats corralled by Democratic Whip Hoyer. Republican leader Cantor will lead the tea party fight against it. Under pressure from her president, Democratic leader Pelosi will defect from liberal colleagues and vote aye.
This would be the American answer to the “unity governments” now taking power in Italy and Greece, in their cases too late to avoid years of painful austerity and restructuring. Whether it can happen here depends on the willingness of those three Democrats and four Republicans to buck their party caucuses, ignore the special interests and put their own political futures on the line, jumping together into the cold waters of bipartisan compromise.
Those who argue that it will require the 2012 elections to break the political stalemate are just kidding themselves. Voters are neither equipped nor inclined to create grand bargains. Those require leadership. If the budget deficit is not tamed now, the chances are it won’t be until the economy is in a steep decline and the financial barbarians are at the gate. And at that point we’ll all be looking back and wondering what could they possibly have been thinking in the fall of 2011?