November 14, 2011

Compromise on the Debt Deal, Not Our Future

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Europe, to put it mildly, is in a bit of a bad way. Sovereign debt crises in multiple E.U. countries, most notably Greece and Italy, have disrupted the integrity of the eurozone, calling the future of the monetary union into question. What’s more, high levels of mutual exposure and deep economic integration mean that should one country default, the continent — and transitively, much of the rest of the world — could quickly plummet into another recession.

Much of the media’s attention has been fixated on the European debt crisis — and rightly so. But this focus has had the unfortunate side effect of allowing us to overlook a brewing problem at home. While not on the scale of the European crisis, the U.S. is facing its own debt reduction troubles, which, if unsolved, could severely undermine an already tepid economic recovery.

Only three short months ago, it was fears of U.S. debt that dominated the news. Congress needed to approve an increase of the debt ceiling to prevent the United States from defaulting on its payments, but Republicans refused to assent to an increase unless it was accompanied by drastic spending cuts. Negotiations were at an impasse until (literally) the eleventh hour, when Democrats and Republicans finally agreed on a preliminary deficit-reduction package.

As part of that deal, spending caps were legislated to save approximately $917 billion over the next decade. The task of reducing the deficit by an additional $1.2 trillion to $1.5 trillion was then left to a bipartisan “super committee,” which was given a deadline to reach a mutually agreed upon solution. Should it fail to do so, the deal mandates $984 billion in automatic cuts.

The passage of the deal in August quickly tempered the fever pitch surrounding the deficit debate. But concern is once again warranted, and here’s why: The deadline for a solution from the super committee is next week, and an agreement is nowhere in sight.

Now, you may be wondering: If there are automatic cuts as a failsafe mechanism, why should we worry about a failure to compromise? Either way, don’t we make progress towards reducing the deficit?

Indeed, the automatic cuts at least do just that. Falling back on such a failsafe mechanism, however, signals to the world that our legislature remains dysfunctional, and that achieving consensus on a viable long-term solution may be simply out of the picture. It is the political, more than the financial, component of our debt fiasco that threatens our country, as the unnecessary default scare in August so demonstrated. In this respect, relying on the automatic cuts would do little to solve what lies at the core of our nation’s troubles.

Thus far, most of the world’s investors have maintained the belief that at some point, somehow, the U.S. will bring its fiscal balance in order. Surely, though, if political posturing and ideological entrenchment continue, that confidence will wane and the American economy stands to suffer. Standard and Poor’s decision to downgrade the U.S. for the first time in history, from AAA to AA+, sent the markets tumbling, with the Dow losing 634 points in a single day. Job creation stalled in August as an air of uncertainty loomed over the economy. Notably, S&P cited “political brinkmanship” as a primary reason for its decision.

The U.S. may face another downgrade if the deficit committee fails to reach a compromise next week. Moody’s, another major ratings agency, insists that the automatic cuts will not necessarily lead to a downgrade, but that it would reflect poorly on the U.S.’s ability to solve its deficit problem. At minimum, a failure to compromise makes a downgrade much more likely.

Even if the U.S. isn’t downgraded again (and certainly if it is), deadlock in the committee might reignite fears among investors and businesses about our country’s fiscal forecast, forcing them to reevaluate plans for capital and labor expansion. Just as in August, uncertainty in the markets will lead to more cautious behavior, an outcome highly antithetical to economic recovery.

Here’s the point: In the near term, demonstrating to the world that we can compromise is as important as the compromise itself.

So why has a deal remained elusive? It may be more diplomatic to say that the failure is collective — a product of both sides’ inability to compromise — but truth be told, it isn’t. Rather, despite Democrats’ acquiescence to heavy spending cuts, Republicans again refuse to meet them with anything beyond minimal revenue increases.

This position, frankly, won’t cut it. It makes little sense to force deeper spending cuts by maintaining historically low tax rates for top earners, especially during a recession in which millions of Americans depend on vital social services in order to achieve a most basic standard of living. Nor can Republicans credibly claim to be speaking for the American people: Polls show that more and more Americans are demanding serious tax reform.

Two-thirds of Americans support phasing out Bush-era tax cuts for those earning more than $250,000 year. Approximately the same percentage support the creation of a 5 percent “millionaire’s tax.” And 70 percent of Americans favor eliminating corporate tax loopholes to ensure that large companies pay their fair share. In short, Republican obstinacy is not a winning position — not for the Republican Party, and not for the United States.

We’ve seen the toll that indecision and political fumbling have had in Greece in Italy; it would serve us well to learn from their example. The deficit reduction committee must restore faith in the United States’ ability to solve its problems through rational compromise. Failure to do so is simply not an option our nation can afford.

David Murdter is a senior in the College of Arts and Sciences. He may be reached at [email protected]. Murphy’s Lawyer appears alternate Tuesdays this semester.

Original Author: David Murdter