While I was pondering over what to say in this week’s posting, a headline on my market screen repeated the comment that Governor Romney’s plan to eliminate the Department of Housing and Urban Development would threaten veterans with homelessness. Admittedly, the claim originated with an office seeker from the other party, but the emotional content it evokes highlights one of the two great difficulties in correcting the fiscal mess that we and other developed countries find ourselves in. After all, who would advocate a move that would allow the men and women who’ve risked their lives for our country to sleep on the streets?
My point isn’t to debate the merits of a particular housing subsidy, which may or may not be the optimal way to deal with the problem, but to make the point that for every budget-busting expenditure or tax preference item, there’s an appeal to patriotism, job creation, innovation, or some other worthy objective. We’d all like to think that deficits will disappear with the elimination of waste, fraud and abuse, but the fact is that cutting spending and rationalizing the tax code will probably be disruptive and painful, and not just for the other guy.
That disruption writ large leads to the dilemma European countries face in imposing austerity programs on their economies and to the threat posed by the massive tax hikes and spending cuts that current U.S. law requires at the end of this year. That’s the second great difficulty. Trying to draw fiscal blood from the stone of a shrinking economy will almost surely fail. As Italian Prime Minister Mario Monti said recently, “Everything, everything, everything that we are doing now is aimed toward helping growth.”[1]
Are we therefore stuck with the vicious cycle we’ve seen in Greece—and perhaps now in Spain and Italy— where efforts to reduce deficits only makes them worse? Not necessarily. Give me a multi-year, Simpson-Bowles-like plan now (okay…I’ll wait for the election) that provides the time for me to adjust my retirement expectations, my savings and my investments, and I’ll grow into it. American business and households have traditionally shown remarkable adaptability once we know what we’re adapting to.
Of course, a plan that can pass through the political process will have significant flaws. What we have now, however, is worse than a flawed plan because we’re now forced to prepare for dire outcomes that almost surely won’t come to pass but would be highly damaging if they did.
As Signore Monti suggests, to help growth, “Stop posturing, let me know what I have to be mad about, and let me do my part.”
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[1] “Monti Puts Halt on Austerity Drive as Deficit Goal Rises,” Reuters, April 18, 2012. http://www.reuters.com/article/2012/04/18/italy-finances-idUSL6E8FICEP20120418