I Really Do Not Understand What the Treasury Is Doing...
It's Not a Deficit Emergency at All

America’s Decline Watch: The Months the Locust Hath Eaten

Project Syndicate: BERKELEY – It is hard right now to write about American political economy. Nobody knows whether the debt-ceiling tripwire will be evaded; if so, how; or what will happen if it is not.

If no deal to raise the debt ceiling is reached by August 3, interest rates on United States Treasury bonds could spike, or they could remain stable, as investors decide they have other problems to worry about. Or the US Federal Reserve, the Peoples Bank of China (PBC), or both – or even some other body – could support the market. Or interest rates could rise if people expect a much weaker global economy – and, in a weaker global economy with no inflation, investors should be holding more US Treasuries, not fewer.

Frankly, no one knows what legislative deal will be struck to raise the debt ceiling. All we know as of this writing is that a deal would probably involve cuts in near-term spending, meaning weaker growth and higher unemployment over the next 18 months. And we can assume that it would be repealed and replaced by something else come January 2013, either by a re-elected President Barack Obama, or by a new, Republican president.

So, rather than talking about the US debt ceiling, let us think instead about all of the things that the debt-ceiling impasse has prevented the US government from doing during the past six months – all of the useful policies that might have been debated and enacted, but were not.

The risks imposed by global warming, for example, have not gone away. The sooner the world starts preparing to deal with those threats, the better. Another six months should not be lost.

The employment-to-population ratio in the US remains flat – mired at the very low levels to which it fell during the recession. With households desperately trying to rebuild their balance sheets, and with capital investment remarkably healthy, the only places to boost spending to restore capacity utilization and unemployment to normal levels are exports, government purchases, and construction investment. But opportunities to pursue the necessary policies have not been grasped. Here, too, another six months should not be lost.

Likewise, the US could have fulfilled its normal role as the conductor of the international economic orchestra. It has not, even as the European Union continues to respond inadequately to its own slow-moving solvency crises. The mandarins of northern Europe continue to measure out a drip-feed of support with coffee spoons. Another six months have been lost.

America faces long-run and short-run problems: decaying infrastructure, weakening educational systems, and a dysfunctional health-care system that produces sub-standard outcomes at twice the cost of any other industrial country. Solving any of these three problems would go a long way toward resolving the long-run financing imbalance between current tax rates and America’s long-run social-insurance promises that the debt-ceiling debate’s instigators supposedly want to address.

But the US government won’t address them. Six months that could have been spent boosting the long-run growth potential of the American economy through infrastructure investment, educational reform, or an overhaul of health-care financing – greatly easing America's long-run deficit and debt dilemmas in the process – have been lost.

During the run-up to World War II, Winston Churchill, speaking in Parliament, lamented “the years that the locusts hath eaten” – the period during which preparatory action to face the great crisis of his day (the rise of Continental fascism) could have been taken, but was not. Over the past century – with the notable exception of the Great Depression – the US political system has been remarkably good at foreseeing crises long before they have happened, and at least setting the foundation for dealing with them when they have occurred.

But so far in the third millennium, this skill – or simply run of luck – has deserted the US. My view is that the problem would fix itself easily if only the Republican Party of Dwight D. Eisenhower could stage a comeback (though without Richard Nixon and Joseph McCarthy).

It is becoming increasingly clear, however, that the problem is one not only for the US, but for the rest of the world as well. Since December 7, 1941, the world has in large part been able to rely on global governance by a somewhat-competent hyperpower. That America may be gone for good. If it is, the world needs to develop other institutions for global management – and quickly.