The Gridlock Where Debts Meet Politics

NYTimes.com – Europe/Economic Memo
Published: November 5, 2011.    By David Leonhardt – Washington

With Greece struggling to form a government that can force harsh austerity measures onto a weary public, Europe is in usual form, taking a couple of steps toward solving its fiscal crisis and then a couple of steps backward. Washington, meanwhile, is hoping that the latest deficit-reduction committee in Congress can succeed where others have failed.

This cycle of bureaucracy and gridlock has been repeating itself for months now. It is tempting to blame feckless politicians on both sides of the Atlantic, and that would not be entirely wrong.

But the frailty of politicians is not the full story. The fact is that most of the industrialized world — Europe, the United States, Japan, too — is in a difficult economic bind. There are no simple solutions that would quickly win the approval of citizens if only politicians were willing to try them.

Most voters in these places have yet to come to grips with the notion that they have promised themselves benefits that, at current tax rates, they cannot afford. Their economies have been growing too slowly, for too long, to pay for the coming bulge of retirees.

“The U.S. and Europe have to make hard choices because of two things: slower growth and aging populations,” saidBarry Eichengreen, an economist at the University of California, Berkeley. “Europe’s choices are even harder than America’s, because the prospects for growth are more dubious.”

By the end of last week, as the Greek Parliament took a big step toward approving a European deal to reduce the country’s debt, some reasons for hope had emerged. Yet the main dynamic had not changed.

Europe still has not set aside enough money to cover its debts, with Italy now presenting the most immediate problems, many economists say. In the United States, a special Congressional deficit committee appears to be making little progress, and some members of Congress have even begun talking about undoing the automatic Pentagon cuts set to take place if the committee deadlocks.

On the most basic level, affluent countries are facing sharply increasing claims on their resources even as those resources are growing less quickly than they once were.

The increasing claims come from the aging of the population, while the slowing growth of available resources comes from a slowdown of economic expansion over the last generation. A complex mix of factors, varying by country, has slowed growth, and the slowdown has been exacerbated everywhere by the worst financial crisis and global recession in 70 years.

The combination has left Europe and the United States with frustrated populations that still have more sacrifices ahead. “These are very difficult moral issues,” saidBenjamin Friedman, an economic historian at Harvard. “We are really talking about the level at which we support the elderly retired population.”

As Simon Tilford, chief economist of the Center for European Reform, a research group in London, said, “Countries will face tougher choices.”

In the United States, the debates center on whether to let government grow as the population ages and whether the affluent, who have done very well in recent decades, should pay more taxes. In Europe, the issues revolve around whether to shrink government, which is bigger than it is here, and whether well-off northern countries likeGermany should support poorer countries, like Greece and Italy, which also suffer from fiscal irresponsibility.

Everywhere, though, the debate is about much more than just partisan advantage or the next election. It is a philosophical debate.

“The country’s in such bad shape, and people wish Congress would do something about it,” Senator Mitch McConnell of Kentucky, the Republican leader, said in an interview last week. “And we have a big difference of opinion about what ought to be done.”

He added, “That is what we do here — we have big debates about the future of the country.”

Of course, politicians have also exposed themselves to legitimate criticism. Mr. McConnell and his fellow Republicans have blocked a short-term jobs bill proposed by President Obama that has broad support from independent economists, and for the most part they have failed to level with voters about cuts to MedicareSocial Securityand the military that a no-new-taxes pledge would require. Democrats, including Mr. Obama, have vowed not to raise taxes on households making less than $250,000, which seems impossible without larger benefit cuts than Democrats have acknowledged.

Polls, however, suggest that there is little political advantage in explaining the reality of future budget math. “Everybody thinks, ‘My taxes are going to fund somebody else’s social programs,’ ” Mr. Eichengreen said, “making people even more resistant to solutions.”

Playing to those sentiments, the presidential contenders in the United States and France seem unlikely to force austerity upon angry voters.

The United States and Europe still have more than enough resources to solve their problems. They are among the richest societies the world has ever known, benefiting from skilled work forces, the rule of law and political freedoms that often help produce economic innovations. The United States also continues to benefit from low interest rates, a signal of the bond market’s confidence.

Yet the United States and Europe face the risk that their problems will feed on each other. Recent economic stagnation may make voters and policy makers unwilling to make hard choices, and the political paralysis might then worsen the economy by creating new financial turmoil. In an article in the current issue of the journal The National Interest, Mr. Friedman named this problem the “no-growth trap.”

In the short term, this trap takes the form of resistance to emergency measures, like Germany’s distaste at bailing out more profligate countries, which may increase deficits. “The central paradox of financial crises,” Timothy F. Geithner, the Treasury secretary, said before leaving for the Group of 20 meetings in Europe last week, “is that what feels just and fair is the opposite of what’s required for a just and fair outcome.”

Longer term, the trap is created by resistance to the higher taxes and reduced benefits necessary to return countries to financial stability. The resistance is understandable, given how weak income growth has been in the past decade, but it is not sustainable.

With Europe facing a series of debt decisions in the coming weeks and the Congressional deficit committee closing in on its Nov. 23 deadline, it is tempting to predict that policy makers will have to start making some big decisions soon. Then again, if history is a guide, they may well find ways to put off those decisions yet again.

Suzanne Daley contributed reporting from New York.

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