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The US Fiscal Crisis: Movement at the Station

March 3, 2011
Most empires collapse because of a fiscal crisis, according to Niall Ferguson, the slick celebrity historian. Well, slick celebrity historians are not always wrong. I invoked him twice last week giving speeches on America’s future as I examined arguments about whether America is locked into decline.With a national debt of 102.6 percent of its GDP, America is in extreme fiscal duress. In 2009 Hilary Clinton had to beg the Chinese to keep buying US Treasury bonds – in part, allowing America to fund its wars in Afghanistan and Iraq. Other countries can reform their budgets but America has divided government, often deadlocked and distinguished by a rule that allows filibuster which means controversial measures require a supermajority in the Senate.

Controversial measures – like cutting long-term entitlements or increasing taxation on the well-off. Yet these are required to wind back the groaning deficit which feeds the crippling debt.

That’s why two developments are very interesting.

One, a proposal by Newt Gingrich and Jeb Bush that would allow US states to declare bankruptcy. Big states like California, New Jersey and Illinois can’t pay their bills and can only increase taxes. These Republicans want to stretch the bankruptcy laws to allow the states to reorganise their finances free from their contractual obligations is an option already available to cities and towns. Republicans like it because it would enable states to renegotiate working conditions and union rights the way Wisconsin is attempting. They would simply treat their unionised workforces like a bankrupt company negotiation with creditors to pay them so many cents in the dollar – pretty brutal.

Second, the first comment by Republican congressional leadership that their forthcoming budget would tackle entitlements head on. This is a shift from their previous position, embraced by the Tea Party, that they would never touch Medicare or Social Security. Now their congressional leadership is promising to bring forth a blueprint for entitlement reform, probably as a result of Ron Paul-style libertarianism within their ranks. The details will be interesting. A higher retirement age for example? That is being proposed by the National Commission on Fiscal Responsibility and Reform.

Brave, because the toughest thing in politics is removing an entitlement. The classic example in NSW of this principle is the school bus subsidy scheme.

 

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