A branch of economics called game theory posits an interesting conclusion. Rational adversaries will not take seriously any threat that is not credible. Such incredible threats would hurt both sides, and should be ruled out in a negotiation.
Clearly, Congress is not rational.
In an effort to put a gun to its head, Congress agreed to delay a plan toward a balanced budget under penalty of a “fiscal cliff” if they fail to come up with an agreement by a specified date.
That specified date came and went as Congress kicked the can down the road. Fiscal Cliff II opens on Friday at a theater near you.
We’ve known for decades we would reach a point when some of our entitlement programs will go into the red. Social Security, intended to be sustainable, now has greater outflows than income and will exhaust its accumulated surplus within two decades. At that point, payroll taxes will have to rise or we will have to reduce benefits or increase the age of retirement.
Medicare has no such surplus. Rising medical costs, greater longevity and a time coming soon when there will be 2.1 workers for every retiree, down from the current 3.1, will force increases in taxpayer funding of medical costs for our elderly.
We have also overspent in other areas. This spending is well beyond our means given our anemic economic growth over the past decade. Unless we again become the innovation nation we once were, there’s coming soon a day of reckoning.
One group has taken this reality to heart. They are a non-partisan group of former statesmen, led by Alan Simpson and Erskine Bowles, who were appointed by President Obama to come up with a plan that will get us on a sustainable path.
They must have done something right because Republicans and Democrats both reviled their recommendations. Simpson-Bowles told Congress what we know but don’t want to hear. Taxes will have to go up, loopholes will have to be closed and some of our favorite tax deductions will have to be curtailed for higher-income individuals. We will also have to reduce defense spending.
Simpson and Bowles were set up. If you take tax reform, defense and entitlements off the table, there is almost nothing left. We can’t renege on interest and principal of our massive debt without dragging the entire world into a depression. Remaining are the government programs representing a piece of the pie too small to absorb the savings to create a sustainable budget.
Sometimes one has to make decisions that are unpopular but are still correct. Sometimes these positions may even be fatal to one’s career. President Obama doesn’t have to worry about reelection, so job security does not explain why he is reticent to accept Simpson-Bowles. But, he still wants to ensure a Democrat replaces him in the Oval Office. He seems worried that Democrats will fail to show up at the ballot box next time if he cuts the entitlement programs his party has built up since the Great Depression.
Republicans, too, are afraid of disillusioning Tea Party voters who brought them to a majority of the House. Worse yet, they fear their incumbents will have to run in primaries against candidates of a Tea Party that is hopping mad about tax increases.
Both parties eschew Simpson-Bowles for fear of repercussions at the ballot box. I suspect that if we could have a private conversation with most of our representatives, they’d quietly concede that Simpson-Bowles is sound.
Integrity is doing the right thing, consistent with one’s core values, whether or not it is the most fortuitous decision personally. Politicians motivated as much by reelection as they are for the next generation have let politics get in the way.
I would trust difficult decisions more to blue ribbon commissions of non-political experts than to those we elect to serve us. Our economy is ill-prepared for the new world in which we live. And yet, we pull this bandaid off slowly.
Now, let’s put mandates aside, cease the stopgap measures and cease political hyperbole. Let’s, for once, put politics aside and sit down and propose how we can sustain this nation so our children and grandchildren are not picking up the tab for our folly and wishful thinking.
Colin Read contributors to Bloomberg.com and has published eight books with MacMillan Palgrave Press. He chairs the Department of Finance and Economics at SUNY Plattsburgh. Follow his tweets at @ColinRead2040.