No more 'me first' mentality on entitlements
The fiscal crisis in Europe has awoken Americans to the enormous challenge we face from entitlements. The promises our country has made over the past few decades, combined with changing demographics and rising costs, have put us on a path to national insolvency. Unless we control our deficits we will face stifled economic growth and impaired standards of living, perhaps even as soon as a few years from now. Most economists agree that raising taxes cannot pay for these commitments; entitlements must be cut. Before we can embrace any reform proposals, however, we must understand the influence our culture has on our decision making.
A nation's culture can have a profound impact on its competitiveness. Our shared beliefs in free markets, fair play and the rule of law inspire entrepreneurs to pursue their dreams and give global investors confidence to bring their money to America. These beliefs have passed from citizen to citizen, from generation to generation. They have strengthened over our history and brought an important competitive edge to the United States.
Our belief in free markets is founded on the idea that each individual acting in his or her self-interest will lead to a superior outcome for the whole. The financial crisis has reminded us that free markets are not perfect -- but they do allocate capital better than any other system we know. A "me first" mentality usually makes markets more efficient.
But this "me first" mentality can also lead to shortsighted political decision making. Most Americans agree that we need more energy from clean sources, such as wind power -- until someone proposes installing a transmission line near their homes. Most people are against earmarks -- unless it is their representative scoring money for their district.
Cutting entitlement spending requires us to think beyond what is in our own immediate self-interest. But it also runs against our sense of fairness: We have, after all, paid for entitlements for earlier generations. Is it now fair to cut my benefits? No, it isn't. But if we don't focus on our collective good, all of us will suffer.
While it does not happen often, our political system is capable of making unpopular decisions that are in our collective best interest. In 2008, during the most severe financial crisis in 80 years, Republican and Democratic leaders in Washington came together to do something deeply unpopular: bail out the financial system via the Troubled Assets Relief Program. These leaders understood the consequence of inaction was economic devastation for Americans. Passing TARP was the right thing to do.
The challenge of entitlements is more difficult than the financial crisis: First, we must reach consensus to make cuts before the fiscal crisis is upon us. TARP was possible only once people could feel the crisis. The House passed that legislation only after the Dow Jones industrial average dropped 700 points immediately after lawmakers voted it down the first time. If we wait until the bond market shuns Treasurys, the economic consequences could be dire. Virtually overnight, we could have far less money to spend on priorities such as defense, education and research. Once confidence in U.S. Treasury bonds is lost, it could take years to return.
Second, bailing out the financial system went directly against our shared beliefs in free markets and fair play. While the vast majority of Americans did not cause the financial crisis, we all had to sacrifice to stop it. Such a cultural violation has angered people nationwide, which makes cutting entitlements more difficult because it will again betray our sense of fairness.
I believe three steps are necessary for our country to embrace any meaningful proposal to cut entitlements:
-- Our economy needs to experience sustained growth, creating good jobs, so Americans feel economically secure. It is hard for anyone to think about long-term sacrifice when they are worried about how to pay their bills today.
-- The emotional bruising inflicted by the financial crisis needs to heal. Along with the passage of time we need a renewed sense that people are succeeding and failing on their own merits.
-- Our leaders need to make the case for cutting entitlement spending by tapping into our shared beliefs of sacrifice and self-reliance. They must be willing to risk their own political fortunes for the sake of our country.
This leads to important questions: Will the bond market provide our country time to heal, both economically and emotionally, in order to tackle entitlements? Or will we be forced to act by an acute fiscal crisis -- at which point it may be too late?
Our leaders need to move quickly to deal with these economic and cultural issues. We don't know how much time we have and the cost of delay could be enormous.
The writer, a managing director of the investment management firm PIMCO, served as an assistant Treasury secretary during the George W. Bush administration. He led the Office of Financial Stability and ran the Troubled Assets Relief Program until May 2009.