America Has Too Much Debt – Even In The Best Case Scenario, Deleveraging Will Take A Decade – No Magic Solutions – President Romney Would Be Stuck, Just Like President Obama

By Paolo von Schirach

January 3, 2011

WASHINGTON – All the Republican would be presidents promise vigorous pro-growth policies that will unleash old fashioned, time tested Yankee ingenuity. The campaign narratives are that, after having been constrained by anti-business policies pushed by closet socialist Barack Obama, with proper leadership, American enterprise will burst once more into the scene and produce fireworks. Yeah…Of course. This may sound good on the campaign trail. But the truth is that America is stuck in the swamps of extremely high debt, public and private; while its economy is threatened by aggressive Asian competitors and undermined domestically by declining education standards that will translate tomorrow into an even less competitive labor force.

Entitlement reform?

The notion that we can just change management, swing back and be instantly reborn as the home of innovation and enterprise, with plenty of jobs for everybody is dangerous wishful thinking. Of course, a new president with extraordinary leadership abilities may be able to rewrite the social compact through a dramatic, yet fair, overhaul of the welfare state. Let’s harbor no illusions. Entitlements reform is absolutely critical if we are serious about changing the dynamics of public spending that have produced the 15 trillion (and counting) national debt. Without changing the spending direction of all major entitlement programs –Medicare, Medicaid and Social Security– there is zero chance to rebalance our federal accounts. Zero chance. So far, under current Obama Inc. management, no progress whatsoever on this. Now ideological divisions dominates, on both sides. The well has been poisoned many times. And so forget about any grand bargain in this election year.

Let’s throw in tax reform

But even if we assume that a magic political realignment in 2013 will give us a new President and a congenial Congress capable and willing to address together entitlement reform, (this would be by itself miraculous), we still need serious rethinking about defense spending. And, as we are at it, we badly need a radical simplification of a byzantine federal tax code that is good only for the special interests who inspired it (and profit from it) and for the tax lawyers and accountants who make money guiding people and companies through its inpenetrable complexity. This mess of a tax code undermines US competitiveness.

Are we done?

A tall order, isn’t it? But we are optimists. Let’s stipulate that we get all this done, and fast, say within the first two years of a new president. This would be of course extraordinary by any historic standard. Yet, we are optimists. So, we check all the items in this extremely ambitious political to do list. And then, after all this heavy lifting, are we pretty much done with the America’s big ticket items? Well, not really.

What about the housing crisis, personal debt, competitiveness and immigration?

We still have done nothing about the ongoing housing crisis, with millions of mortgages underwater and millions of Americans still paying off the debt accumulated during the years leading to the 2005-2006 bubble. And we have done nothing about recreating truly competitive economic sectors with which we can fight aggressive Asia. And we have done nothing about improving awful public education standards. Not to mention finding a national consensus for comprehensive immigration reform, so that we can make the 12 million plus illegals legal, while encouraging smart people from all over the world to come here as they used to, because America once again wants to welcome entrepreneurs who think big and want to take their chances in a business friendly country.

America became too comfortable

The truth of the matter is that America, after the roaring 1990s in which it really had an edge because of its far more developed IT industries and because of the positive impact of IT in improving the productivity of old sectors, assumed that it primacy would be unchallenged. And so we all started spending, while Asia was just beginning to rev up. And eventually the nasty side of globalization hit us, decimating the least competitive sectors one by one. Like it or not, America, the unpleasant but unmodifiable truth is that in interconnected global markets the price of everything, including labor, is determined by the lowest cost competitor.

But instead of dealing with this unpleasant reality, we all got crazy and thought that we would get rich with real estate. And now we are back to reality. We have done very little about restoring competitiveness, while we have destroyed our capital, (and whatever we borrowed along the way), in insane real estate investments.

Could president Romney change all this?

Given all this, let’s assume that Mitt Romney gets the Republican nomination and then the White House. You can rest assured that to get elected he will over promise, and then he will be unable to deliver, simply because you cannot easily turn around a country in the midst of a 20 to 25 year deleveraging process. Yes, very simply we have too much debt, as US government and as American people. Even assuming a best case scenario, this deleveraging will take at least another decade, probably longer. It would take a real genius in the White House to establish a long term national consensus on a proper course of action that would finally restore federal finances, while helping people regain their footing at a reasonably fast pace.

Obama’s theme is about “equality” and not about growth

We have seen how president Obama, lacking any real feel for serious pro-growth ideas, aside from ill advised industrial policies that backed the wrong sectors, (yes, we are talking about renewable energy), now has thrown his considerable weight on the side of the “social justice” cause. In the abstract, this is a good cause. But in practice it is all about finding ways to get the political applause of core Democrats in proposing supposedly better ways to share our national misery. Good politics, no doubt; but terrible economics.

Capitalism, Mr. President, is mostly about growth and only a little bit about equality. If the national conversation during the next Obama term is going to be mostly about how to redress inequality, then we are doomed. Not because this is a bad idea per se. But because it is a bad idea at this time. Right now equality is not the central issue. The central issue is how to promote growth. And we need a steward who gets this central point. Larry Summers knows this, the president does not.

A Republican in the White House would hit the wall of debt

On the other hand, even a fiercely pro-business Republican would run against the wall of debt. He can try and he can push; but, without resources, this indebted society will move slowly, hopefully in the right direction, but very slowly. And so President Romney may end up disappointing his voters, because during the campaign he promised millions of new jobs that will not be there.

We should get serious and tell the truth

So, what do we do? First of all, aspiring political leaders should start by telling the unvarnished truth. America is in serious trouble. We need to get to all those items outlined above. But nobody wishes to say what very few are prepared to hear. Almost no one wants to hear that we have systemic problems that cannot be fixed even at the end of the president’s mandate, as they are huge and complicated. Unfortunately, US political rhetoric, left and right, is all about the mirage of instant delivery. And an election year in which silly, outlandish promises will be made every day is the worst possible moment to ask for seriousness. And yet, unless we get serious, and tell the truth, this country is in real trouble.

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