From a paper by Paul Posner
Paradoxically, the global financial strength of the United States may ultimately constitute a weakness. Simply put, we have the capacity to weather high levels of debt that may bring other nations to the brink of a loss of investor confidence and a subsequent economic meltdown. Carmen Reinhart and Ken Rogoff observe that many nations with weak economic underpinnings default at debt levels below 60 percent of their economy.
Waiting for a crisis before we begin serious fiscal actions and reforms would force the nation to go through years of slower economic growth in the wake of higher interest rates and current account deficits stemming from years of reliance on foreign-held debt. Moreover, the flexibility to respond to emerging needs or other crises would be severely curtailed as interest costs grow inexorably to crowd out other budgetary priorities. Lacking the dramatic signals of a crisis, we may in fact be able to muddle through at relatively high levels of deficits and debt for years to come.
A couple of quick comments, made less charitable by their brevity
1) I read Ponser’s statement that strength may be a weakness as “strength may prevent the US from doing what I want it to do” However, seemingly its what lots of other people want to do.
Getting to do what you want to do is, first order, a good thing. You face a heavy burden when trying to make the argument that people are better off doing something they don’t want to do.
Indeed, I suspect the real case here that we would be higher status if we tackled the budget gap and we could maintain more national prestige.
2) Obviously there is the argument that doing something about the budget gap now will make today’s crisis even worse and as crises go this is a pretty bad one. There are plenty of people making this case.
I want to always keep our eye on the longer case though that the very reason people don’t want higher taxes and lower spending is because they would be unpleasant. The argument that we should do something unpleasant now or else something else unpleasant might happen later is starting from a position of weakness.
You might be able to make up for that weakness with a really rock solid argument but you are climbing a steep hill.
This problem is made worse not better by pessimism. I have been accused of saying “oh don’t worry everything will work out.” No, no, no. I am saying “don’t worry everything will definitely not work out”
The things that you care about: your life, the lives of your friends and family, the organizations and institutions you are invested in, will soon come to an end. Gather ye rose buds while ye may.
3) The opportunity to muddle through is a gift. It allows one to make changes at the margin, to monitor their effects and to update accordingly. It allows us to avoid massive often useless sacrifice. It allows our knowledge, understanding and resources to race ahead opening up new ways to deal with our problems.
We don’t always have that opportunity. Sometimes we are forced to deal with things in a big way. Indeed, this is much of what we mean by crisis. However, you don’t want to avoid an externally inflicted crisis by creating a self-inflicted one. If you have a chance to make your way with adjustments at the margin, take it.
The moral is that we are lucky to have the luxury of irresponsibility. In large part due to repeated disastrous attempts at farsighted thinking the Euro-Zone has locked itself into a state of pain and unfortunate sacrifice. This began with the creation of the Euro itself and continues to this day. I can only hope that the US is able to avoid adopting such farsighted measures.