- By Phil LevyPhil Levy is Senior Fellow on the Global Economy, The Chicago Council on Global Affairs, and teaches strategy at Northwestern University’s Kellogg Schoool of Management.
When is the best time to hold a fiscal crisis?
The obvious answer might seem to be: never. Crises are not much fun, can be very costly, and people tend to get hurt. Had President Obama embraced the recommendations of his own bipartisan fiscal commission, or had he put forward a budget that addressed the country’s long-term fiscal imbalances, ‘never’ might have been an option. But he did not. Instead, the country is on an unsustainable fiscal path of borrowing and escalating debt.
As Herb Stein once aptly put it, if something cannot go on forever, it will stop. In fiscal matters, such stops can precipitate crises. When the rest of the world decides a country is not credit-worthy, interest rates can soar at the same moment that the country is trying to cut back on spending and raise taxes, thus combining contractionary fiscal and monetary policy in an ugly mix.
If that is what lies in the future for the United States, is it better to face that future sooner or later? It may depend on whom you ask. For the country as a whole, there are a number of reasons to prefer sooner.
First, the longer fiscal adjustment is postponed, the greater and more painful the ultimate fix needs to be. The debt burden rises over time and inescapable interest payments rise with it. For spending cuts, if those in and near retirement are to be shielded from major entitlement changes, the "grandfathered" populations will grow dramatically in the years ahead.
Second, crises can occur at inopportune moments. The global financial crisis that exploded in September 2008 came at a particularly bad time. The country was led by a lame duck administration that felt it had little sway over an opposition Congress. The political class was caught up in an election that was not conducive to crafting a careful, bipartisan policy response.
Portugal provides a more recent example of awkwardly-timed crisis. Its government fell just as it was negotiating a financial rescue package that required painful and contentious adjustments. It was constitutionally prohibited from holding a quick election and has thus been trying to conduct critical and difficult bailout negotiations with only a caretaker government.
So why not move quickly to address an impending fiscal crisis? If you’re an incumbent politician, later can look better than sooner. You might hope that something unexpected will come along to avert the crisis, such as a global economic boom. Or, at least, you might hope that the crisis will wait until you’ve left office. Moreover, if you choose to address the crisis sooner and successfully avert it, there will inevitably be those who wonder whether all the painful adjustment was really necessary and whether the crisis would have taken place at all. This may be the case in Britain, which took serious steps to address its fiscal imbalance this past year.
Back in the United States, at present, commentators have heaped scorn on Republicans for daring to play chicken with the debt ceiling, calling it wildly irresponsible. Implicitly, those are arguments that it is better to hold our crisis later rather than sooner. That may be neither responsible nor right.
If U.S. political leaders do not act now to address the growing federal debt, when is the next propitious moment? Given recent rhetoric, it seems unlikely that a bipartisan accord would spontaneously emerge during an election year. One can imagine electoral outcomes that would allow serious action in 2013, after the next vote, but that begs the question of whether global financial markets will wait that long. At the moment, U.S. debt is precariously balanced between dire analyses, such as that accompanying the recent S&P downgrade warning, and the woeful lack of attractive alternatives on the world scene. This balance could persist for years, but to assume it will is undeniably risky.
Given the president’s reluctance to put forward or embrace viable fiscal solutions, the debt ceiling looks like one of the very few options for forcing an adult conversation about fiscal imbalances in the near future. Critics are correct that this approach risks a crisis, but that’s really just a question of timing. If the confrontation prompts a serious approach to fiscal issues, that may be the country’s best hope of avoiding a crisis altogether.