Neel Kashkari, head of global equities at 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. Libby Cantrill is a senior vice president and member of the executive office at Pimco.
Many politicians in both parties recognize that the United States is on an unsustainable fiscal trajectory, with the Congressional Budget Office forecasting a deficit this year of almost 8 percent of gross domestic product, the federal debt hitting 90 percent of GDP this decade and an entitlement spending crisis on the horizon. Given the number of Americans who will be affected by these issues, many are hoping that policymakers will devise a “grand bargain” that will address these issues at once. The attractiveness of a large-scale compromise is clear: In a democracy, citizens are more likely to support policies requiring their own personal sacrifices if everyone else is sacrificing as well.
Unfortunately, divisions and political expediency in Washington make a grand bargain unlikely in the near future. Republicans and Democrats cannot seem to agree on much, other than that they don’t like each other, and neither party seems to have the political courage to address our country’s structural problems.
Consider how little progress has been made toward averting the looming U.S. fiscal crisis. Instead of passing meaningful fiscal reforms over the past several years, Washington has enacted numerous short-term fixes and extensions. The full Congress hasn’t passed a new budget in three years. Expiration of the George W. Bush tax cuts, the debt-ceiling limit, and the required budget cuts, or sequestration, that stem from the failed efforts of the “supercommittee” effort to address the country’s deficit issues all converge early next year in what’s being referred to as the fiscal cliff.
Yet businesses don’t have the luxury of waiting on the sidelines until Washington gets its fiscal house in order. Shareholders demand that businesses continue to innovate, plan and invest for the future. Any sustainable economic recovery will require companies to continue to invest, and they must make investment decisions based on what is likely to happen, not on what they would like to see happen. Given Washington’s recent track record of failure, businesses cannot make long-term investment decisions under the assumption that an elusive grand bargain will materialize.
The most likely scenario for the near future is continued brinkmanship and last-minute, short-term extensions. The effects of this eleventh-hour, patchwork approach to policymaking are insidious and destructive to the U.S. economy, businesses and job creation. Last summer’s debt-ceiling fiasco roiled markets and undermined the public’s faith that our elected leaders could rise above the rancor and do what is in the country’s best interest. Investors and businesses were left questioning the basic functioning of our democracy — our ability to govern. Since investors have global choices of where to invest, each short-term extension and bout of brinkmanship increases uncertainty and motivates investors to look abroad.
And, because of policy uncertainty, economic behavior is distorted. U.S. businesses make fewer capital investments than they otherwise would. They hire less, as seen most recently in the disappointing employment report released Friday. All of this translates into a drag on economic growth.
The good news is that the unlikely grand bargain or even continued dysfunction are not the only options. Politicians could try to tackle relatively smaller issues, individually, as a step to rebuild public confidence. Some smaller but still meaningful wins could include:
Reforming the corporate tax code. Several Republicans and Democrats have identified corporate tax reform as a near-term priority that could help jump-start our economy. Some work is already underway in Washington. The United States has one of the highest statutory corporate rates in the world, although the rates that businesses ultimately pay are much lower because some companies, especially large ones, are able to exploit loopholes and deductions. This complexity encourages investment abroad while unfairly benefitting some companies over others, leading to the misallocation of capital. An agreement that reduces statutory corporate tax rates in exchange for eliminating deductions and simplifying the code should be possible.
Tackling Social Security. Social Security is considered the easier of the entitlement problems to address, especially if it is done early enough. According to the 2012 Social Security and Medicare Board of Trustees reports, Social Security is on significantly more sound fiscal footing than Medicare is, and addressing the Social Security shortfall is arguably more straightforward than tackling the rise in health-care costs, a significant driver of Medicare’s growth. Shoring up Social Security requires some combination of modifying how benefits are indexed for inflation, increasing the retirement age, means-testing benefits and raising taxes — all without having to affect those close to or in retirement. If lawmakers were to address Social Security shortfalls now, they would be able to do so in a measured, balanced way that would not undermine its function as an essential retirement savings vehicle for millions of Americans.
Revamping immigration policy for highly skilled workers. Business leaders have called for years for an overhaul of immigration policy for such workers — especially for those with advanced degrees in science, technology, engineering and math. Many politicians agree that U.S. universities attract the best students globally, yet our flawed policies force these bright people to leave after graduation. Encouraging the best students to stay, to build new companies and to contribute to industry, will aid our economic growth, increase our competitiveness and improve our long-term fiscal situation. Lawmakers should put politics aside, expand visa programs for highly skilled workers and provide a pathway toward citizenship for foreign-born students who earn advanced technical degrees in America.
Small victories can lead to larger victories. Reforming our corporate tax code, tackling Social Security or revamping our immigration policy for highly skilled workers will not, by themselves, solve our long-term fiscal challenges. But any of these compromises would signal to investors worldwide that the United States is capable of tackling its structural issues and remind them that America is an attractive destination for investment. Reaching agreement on these issues could also begin to build trust between the parties. Many will argue that nothing can happen until after Election Day. Perhaps. But there is always another election around the corner. Washington has spent enough time on short-termism and partisan bickering: It is time to govern.