A Solution to Our “Manufactured” Crisis

Unlike our counterparts in Southern Europe, the United States is blessed to have a fairly steady economy these days. While economic growth is not as robust as it has been in years past, it is at least solid and jobs are steadily returning in the private sector. Financial markets reflect the solid outlook for leading U.S. industries like information technology, health care, energy, automobiles, and basic manufacturing industries. The U.S. has become the world’s leading energy producer, helping to ameliorate our long-standing dependence on foreign oil that has led to unfavorable trade balances. Even the enormous government deficits of the last decade are starting to decline, thanks in part to the involuntary sequestration of spending.

A Manufactured Crisis with No Easy Way Out

So why are we flirting with a historic default on U.S. government bonds that will harm the U.S. credit and credibility for decades to come? Simply stated, our political leaders have manufactured a crisis. They know they are playing with fire, but no one seems to know how to put it out.

At this weekend’s meetings of the World Bank and International Monetary Fund, world financial leaders like Christine Lagarde, head of the IMF, and Jim Kim, president of the World Bank, were almost apoplectic in their dire warnings about the impact of a U.S. default on the global economy. Even the threat of a default risks “massive disruption the world over,” said Lagarde on Sunday. U.S. leaders like Jacob Lew, Secretary of the Treasury, and Jamie Dimon, chair and CEO of JP Morgan, echoed similar concerns but offered no viable solutions.

In the past two years many U.S. political leaders seemed to enjoy beating up on the Europeans for the fiscal crisis in Greece that threatened to spread to Italy, Spain and Portugal. While Germany’s Angela Merkel steadily worked to solve the problems through austerity and restraint, U.S. leaders and commentators like Paul Krugman took potshots at the Germans for not bailing out the Greeks with greater deficits and expanded borrowing.

The big difference here is that Greece’s fiscal crisis is real, while the U.S. problems are entirely the result of a dysfunctional political system. The blame can be squarely placed on leaders who fail to put their country ahead of personal political gain. Sadly, there is no easy way to overcome this political crisis, as the sides are so polarized. They are likely to remain so due to the gerrymandered Congressional districts that created the split in the first place.

I feel confident we will find a way to muddle through the artificial debt ceiling, even if President Obama has to violate the law to do so, but the damage being done will stay with us for years to come. The Chinese and other big lenders will eventually find alternative currencies or a reserve currency basket where they can park their funds. Interest rates will rise, giving an upward nudge to inflation.

But what about Washington? When a power vacuum is created in a democracy like ours, other forces take over. Under the leadership of Chairman Ben Bernanke, the Fed has been offsetting the lack of fiscal policy during the last four years by making ever greater uses of monetary tools like quantitative easing. Bernanke’s successor, vice chair Janet Yellen, is likely to continue these policies until Congress and the administration get their respective acts together, which could be a long time.

A Solution for this Manufactured Crisis: “Think Local”

The solution, I predict, is that states and municipalities will steadily assume more power. As federal entitlement programs assume an ever-larger share of the federal budget, they will squeeze out spending for most domestic programs. At present no one in Washington seems to have the political will to solve the looming fiscal crises of Social Security, which could actual be resolved quite easily, and Medicare/Medicaid, which will become an increasing sinkhole for funds for the foreseeable future until we get serious about healthcare costs.

This puts the burden for quality of life on the backs of the governors and big city mayors. Given the diversity of the country across 50 states, this may be a good thing. Locally-elected officials are that much closer to the people who vote for them and thus more responsive to their needs. By returning power to states and municipalities, we empower local people and their elected leaders to tailor solutions to their local problems.

Health care and education are essentially local issues. The complexities of health care and education, coupled with the growing diversity of our states, are so great that they defy “one-size-fits-all” national solutions. Ultimately, local leaders will come up with sounder, more practical solutions that fit the needs of their unique populations. They will be more effective at engaging the business community and non-profit organizations to partner with them in seeking these solutions. Instead of spending money and time lobbying in DC for little gain, business and non-profit leaders can focus on making things work locally and on contributing their own resources to enhance quality of life for their employees, dependents and communities.

My bottom line: because of the dysfunctions in the federal government and the growing diversity of the country, we are witnessing nothing less than a historic shift of power to states and municipalities. In the end this will prove healthy for our country as we generate higher levels of commitment and collaboration among the government, business and non-profit leaders that lead to higher quality of life for all Americans.