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Bill George

Harvard Business School Professor, former Medtronic CEO

Politics Trumps Sound Fiscal Policy (Again)

Yesterday’s “compromise” between Republicans and the President proves an old adage: political giveaways always trump sound fiscal policy. Or stated another way, it’s easier to agree to increase the deficit $4 trillion over the next ten years than it is to reduce it that amount.

What a difference a weekend can make. Just last Friday the 18-member Deficit Reduction Commission, appointed by President Obama and led by former Republican Senator Alan Simpson and former Clinton chief of staff Erskine Bowles, voted 11-7 to pass a package of deficit reduction items totaling $4 trillion over the next decade. That would have helped the United States get out of the financial ditch we’re in right now and back on the road to fiscal responsibility.  Unfortunately, the seven “nay” votes, six of which came from politicians, keeps the majority from forcing a vote on this package in Congress. Now it goes to the White House for “review.”

One would have hoped this moderate set of fiscal policy initiatives, backed by a bipartisan majority, would have given the President the courage to recommend adoption by Congress. Quite the contrary. Republican leaders, who historically represented the party of balanced budgets and fiscal stability, instead negotiated with the President increase the ten-year deficit by $4 trillion by extending the Bush-era tax cuts. Granted, this is a “temporary” extension for two years, but who believes in the heat of the 2012 Presidential elections that sixty senators and a majority in the House will vote to kill further extensions. Don’t bet your Medicare on it!

For the mathematically inclined, that’s an increase of $8 trillion in the deficit in just three days. As they say, not bad for a weekend of work.

There is no doubt that today’s American voters favor unlimited tax cuts and unlimited government spending for their retirement and their health care. Instant gratification rules over long-term plans.

The consequence? This generation will pass on an impossible financial situation to the next two generations, which inevitably means their standard of living will decline. Just paying interest on our national debt will absorb the bulk of taxes Americans pay.

To their credit, Bowles and Simpson along with their fellow commissioners tackled the deficit head on.  Esteemed for their independence, they took on a task that nobody in Washington will touch: telling the truth to the American people.  They recommended raising the Social Security age, reducing the number of federal workers, dramatically cutting defense spending, eliminating many tax deductions, and reforming both personal and corporate income tax rates. All sound ideas, mostly containing some short-term pain for long-term gain.

Congress is broken.  An incumbency bias, an increasingly polarized media, and hyper-partisan political parties are destroying the last shreds of civility – and replacing it with an angry, ineffective politics that fans the flames of anger and hostility throughout the country. Thus, our political leaders are contributing to the tendency of Americans to think they are entitled to instant gratification and can blame someone else for their troubles.

Starting in January, the U.S. government will officially have split government. The President and the new Congress face problems of extraordinary magnitude.  Senate Budget Committee Chairman Kent Conrad affirms that the United States borrows 40 cents of every dollar it spends, and the federal budget deficit equaled 8.9% of Gross Domestic Product for the fiscal year ending September 30. 

There is much talk of the problem, but little serious dialogue about how Republicans and Democrats might work together to solve it. Instead, both sides sound like they prefer “gridlock” for the next two years. If President Obama is re-elected in 2012 and the Republicans take the majority in the Senate, gridlock could last for six years.

This country can ill afford gridlock and economic malaise while the deficits continue to grow. Meanwhile, other nations like China, India, Germany, Brazil, Singapore, and even the United Kingdom are moving ahead rapidly to become more competitive in world markets.

In the end, a nation’s strength comes more from its economic strength than its military might. On that score at least, we are steadily losing the battle for global competitiveness as our standard of living is forced to decline.

The real problem is elected leaders looking for short-term solutions – quick fixes, if you will – to long-term, intractable problems. Our problems of fiscal stability, job creation, economic strength, and education can only be solved with long-term solutions that require unified action. 

Politicians who place narrow self-interests ahead of the long-term best interests of the nation imperil our future. It is time for our elected leaders, Democrats and Republicans alike, to treat the American people like adults and tell us the truth about the near-term sacrifices we must make if the country is to regain its economic might and national pride. 

Let’s get on with solving long-term problems with long-term solutions. It is the only way to catapult the U.S. back into global leadership.