The VAT may resolve debt crisis, but for politicians it's too soon to be right

By David Ignatius
Thursday, April 29, 2010

Charles Peters, the editor of the Washington Monthly, the lovable but financially challenged magazine where I got my start, had a slogan that he used in direct-mail solicitations: "If you're not afraid of being right too soon."

But of course, everyone is afraid of being right too soon. It's bad politics, being out of step with the herd; it looks like you're greedy if you profit from being wise while others suffer from their stupidity. People want to be "right" at the same time everyone else is -- with the result that they delay action until the crunch hits with devastating force.

Take the case of Goldman Sachs, this week's favorite whipping boy. "Goldman Sachs sought to protect itself from a collapsing housing market by selling mortgage investments that it knew were likely to fail," read the lead of a Post story posted on the Web Monday. Scandalous! Why didn't they wait and get cratered like the folks at Lehman Brothers, R.I.P.?

The herd gallops toward the precipice for a simple reason: It's lonely and unpopular to go the other way. Take the question of tax policies that could avert the next big U.S. financial disaster, which is our ballooning federal deficit.

The sensible real-world answer, many economists argue, is a value-added tax that would encourage saving at the same time it pays down the deficit to manageable levels. But politicians are terrified of being right too soon on this one. The Senate this month voted 85 to 13 for a resolution that called the VAT "a massive tax increase that will cripple families on fixed income" -- and vaporized its political prospects.

By ruling out a VAT when it could keep the federal deficit in check, politicians have all but guaranteed that the debt crisis, when it comes, will be more damaging. But by then, everyone will be clamoring for a VAT, so it will be safe to endorse it.

A particularly dangerous example of this law of political inaction is the Greek debt catastrophe in Europe. Americans haven't been paying much attention to this one (because . . . it's Europe!), but it's getting scary in financial markets.

The profligate Greeks have been spending far more than they produce and borrowing to cover the difference, with the result that their debt-to-GDP ratio stands at roughly 120 percent. What's more, it seems that the Greeks have been fiddling with the numbers, issuing regular revisions that show the debt problem is worse than estimated.

German politicians (who have the money) have been dithering on resolving the crisis because they know how unpopular it will be to bail out the Greeks -- even though they also know that if they don't, the finances of the European Union could collapse like a bad soufflé.

The result this week has been a growing financial panic. There are essentially no buyers for Greek government securities, which means their prices have collapsed and their yields have skyrocketed. On Monday, the yield on a two-year Greek government bond jumped three percentage points to close at 13.52 percent. By Wednesday, the yield had soared to 21.1 percent. The market is betting that Greece will have to default.

And the contagion is spreading in Europe while the German politicians wait for a safe consensus on a bailout. Yields on two-year notes issued by Portugal, another potential basket case, jumped roughly two points over two days to 6.09 percent on Wednesday, and buyers are rushing to sell debt issued by the other Euro-weaklings: Spain, Italy and Ireland.

"Greece is Europe's very own subprime crisis," read the headline on a column by Wolfgang Münchau in Monday's Financial Times. The head of one prominent hedge fund warned in a letter to investors this month that as a result of the spreading crisis, he saw "the potential breakdown of the European Monetary Union."

It is part of the human comedy that we sense what's coming but do not take action. The truly devastating shocks aren't the ones that sneak up on us but those we see approaching, inexorably, yet can't summon the political will to address.

President Obama could champion the cause of deficit reduction. He could insist that the new bipartisan National Commission on Fiscal Responsibility and Reform that began work this week consider a VAT and other aggressive measures to keep our debt from reaching crippling levels by the end of the decade.

But taking action now would be stupid politics. The president would be right too soon. Better to wait until disaster is at hand.

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