No Way Out?

“How long can the world’s biggest borrower remain the world’s biggest power?” Larry Summers

Indeed. The problem, of course, is that it seems that our government can't balance the budget without the benefit of world peace and a dot.com bubble. The Times almost notices this when it writes, "Mr. Obama has published the 10-year numbers in part, it seems, to make the point that the political gridlock of the past few years, in which most Republicans refuse to talk about tax increases and Democrats refuse to talk about cutting entitlement programs, is unsustainable."

I say almost notices this because my current research project indicates that this gridlock is hardly new. The exact same "gridlock" blocked deficit correction in the wake of the Vietnam escalation, in the wake of the Reagan military buildup, and in the wake of the 9/11 military buildup. In each case, everyone wants to reduce the deficit, they just disagree about how. Wilbur Mills blocked Johnson's proposed tax increase for a year in order to force Johnson to accept cuts in Great Society programs. And how soon we forget the congressional war of attrition that brought us Gramm-Rudman-Hollings. Nothing really new about the current gridlock.

What is new is the scale. In past episodes, inability to correct a deficit sparked a financial crisis and the crisis broke the political deadlock. In this episode, the magnitude of the financial crisis has prompted a political response that increased the deficit. Probably warranted. However, we are stuck now with a system incapable of corrective action and a deficit of rather unprecedented proportions. How big a crisis will it take to shake us lose from this equilibrium? And how much power do we lose as a consequence?