Simon Johnson: U.S. isn't in fiscal crisis, but we're on our way
Simon Johnson, former chief economist at the International Monetary Fund, has an important post on the NYTime's Economix blog, challenging the predominant austerity narrative.
The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis. Overly indebted countries typically have a hard time financing themselves when the world becomes riskier — yet turmoil in the Middle East is pushing down the interest rates on United States government debt. We are still seen as a safe haven.
Nonetheless, leading commentators and politicians repeat the line “we’re broke” and argue that there is no alternative to immediate spending cuts at the national and state level....
The most immediate problem is that our largest banks and closely related parts of the financial system blew themselves up in 2007-8. The ensuing recession and associated loss of tax revenue will end up increasing our government debt, as a percentage of gross domestic product, by around 40 percent. Very little of this debt increase was due to the fiscal stimulus; mostly it was caused by lower tax revenue, because of the slump in output and employment....
The only room for bipartisan consensus here seems to be what we got in December 2010 — a big tax cut. Cutting taxes is nice, but only if it is consistent with keeping the budget on a sustainable path.... the problem here is bipartisan — as it was with the tax cut last year. None of the leadership on either side is willing to talk openly about how our biggest banks caused great fiscal damage. No one is willing to explain why our health care costs continue to rise. And no top politicians currently champion real tax reform.
The Republicans have seized a moment. To them, this is not really about fiscal responsibility; this is about an opportunity to shrink the size of government.
Both sides of our political elite have contributed to the sense of fiscal crisis. And as we continue down this path — dangerous big banks, out-of-control health care spending, significant tax cuts, small changes in nonmilitary discretionary spending and irresponsible rhetoric on both sides — we are well on our way to a real crisis.
In other words, the political expediency of appealing to supposed moderates by being willing to compromise and finding "bipartisan" solutions might have been good for Wall Street and the wealthiest Americans. It's not been at all pretty for the millions who no longer have equity in their homes and downright disastrous for the one-fifth of Americans who are unemployed or underemployed.
The pressing fiscal crisis the nation faces is the job deficit, and slashing public spending is only going exacerbate that problem. "So be it," says Speaker Boehner. And so it will be unless President Obama and other Democratic leaders embrace reality and reject austerity.