There is something about the impasse over the fiscal cliff that seems eerily familiar.
The underlying U.S. economy is reasonably sound, and our problems well within our capacity to solve. The open question is whether our political institutions are up to the challenge. The nation’s credibility as a global leader is in question.
We’re now Europe.
In 2011, the 17 nations that use the euro currency had, in the aggregate, a budget deficit of about 4 percent of GDP — less than half that of the United States. The euro zone’s total debt was 87 percent of GDP, roughly the same as the United States. Yet the euro zone faced a devastating crisis that nearly brought the European and global economies to their knees. The currency itself was repeatedly on the verge of unraveling; unemployment skyrocketed to 25 percent or higher in Spain and Greece; governments fell in those countries and in Italy; and half a century of progress toward a united Europe very nearly came to a halt. Much of the continent is still in recession.
The continent’s annus horriblis was not a product of the fundamentals of the European economy. There was no inherent reason to suffer a severe crisis as a way to force long-overdue regulatory and labor market reforms on Spain and Italy. Rather, it came about because Europe’s political institutions were not strong enough to handle the crisis when it emerged. While Europe had a common central bank in charge of setting interest rate policies, it did not have the kind of powerful, central authority that could channel money to the countries and banks at risk of faltering. Instead of crisp decision-making by a single parliament, there was instead an endless series of summits among national leaders and their finance ministers who were trying to create new political institutions on the fly.
Like Europe, the United States did not need a recession-creating crisis to bring about economic reform. U.S. budget deficits are large, but so far manageable. Interest rates are extraordinarily low, and the “crisis” the nation faces is not a traditional fiscal one, but rather a risk that decisions made in the past will, absent a deal between Congress and the White House, bring on a sudden bout of deficit reduction so severe as to cause a recession.
This is a tinderbox of our own making: Put a group of budget experts in a room in the morning, and ask them to hammer out a thoughtful, careful deficit-reduction deal that, over time, would make the U.S. economy more competitive, and they could be done in time for cocktail hour. They might be done in time for lunch. But the challenge, of course, is not figuring out a set of policies -- it is determining what could survive a convoluted system of lawmaking.
We have a constitution written two centuries ago that divides the power of the purse among the president, House and Senate. This is a test of those institutions. Can a government structured to have three, separate nodes of power — controlled now, as is often the case, by parties with different policy visions — come together to make a coherent national fiscal policy?
The best case for answering “yes” is that the American political system has proved strikingly resilient over the last couple of centuries, weathering crises far greater than anything that might be caused by the fiscal cliff (Civil War? Great Depression? Two world wars? These make a budget sequester seem like child’s play).
“When I meet with economic leaders across the globe, they do not doubt the underlying strength and dynamism of the U.S. economy, or the entrepreneurialism and inventiveness of our people,” said William Dudley, president of the Federal Reserve Bank of New York, in a speech at Pace University. “But they do wonder whether our political system is capable of putting the national interest above partisan interests and making the tough choices needed to address these challenges.”
“If a credible bipartisan agreement is reached, it will strengthen global confidence in the U.S. and underscore to the world that our country remains a great place to do business and invest in,” Dudley argued. “Failure would suggest a degree of political dysfunction that could undermine U.S. economic leadership and could encourage global corporations and investors to invest elsewhere.”
The Europeans were trying to create new institutions on the fly in the face of a crisis. The United States is testing whether our centuries-old institutions are up to modern challenges. Europe bungled the process enough so that its standing as a credible, global leader is in doubt. The goal for the United States is to achieve a better result.