Washington needs to stop searching for a grand bargain and start working on politically viable steps that do not require the hammer of imagined fiscal meltdown to motivate action.
A drumbeat of pundits, policymakers, and private sector actors continue to warn that if the US does not conclude a serious fiscal grand bargain then a financing crisis will occur in the near future. But searching for a grand bargain might actually make a crisis more likely. The reason lies in the safe haven curse.
Muted market reaction to the fiscal battles and credit downgrade of 2011 affirms America's continued safe haven in a world of turmoil. This affords Washington the luxury to run continuing deficits at low cost, which means crisis is a ways off. The logic of the curse is straightforward: cheap financing reinforces complacency among policymakers. Why make tough choices today if there are no consequences to putting them off?
The problem is that Washington remains convinced that it needs a grand bargain that proactively answers the toughest long-term fiscal questions all at once. The safe haven curse explains why that did not occur in 2011. It also implies that no election outcome on November 6 will make it any more likely going forward. While there is no crisis today, if policymakers continuously try and fail to ink a big deal, at some point time will run out.
NO GRAND BARGAIN
To lift the safe haven curse, Washington needs to stop searching for a grand bargain and start working on politically viable steps that do not require the hammer of imagined fiscal meltdown to motivate action.
Manageable deficit reduction measures are within political reach. In fact, fiscal savings has always been achieved through a series of reasonably-sized steps to fix problems in succession at ripe political moments, rather than as a gigantic leap that fixes everything at once. Congress raised taxes a handful of times in the 80s and reformed both the individual and corporate tax code in 1986. It also crafted a succession of deficit deals in 1990, 1993, and 1997 that each saved hundreds of billions of dollars.
But Washington has never fixed everything at once because it has never been fiscally necessary to suffer the political pain that comes with doing so. Despite all the rhetoric, it is not necessary today.
The next president and Congress should set aside long-term questions about entitlement reform and start with areas of overlap--one at a time. There are hundreds of billions of dollars in mandatory spending cuts that both parties agree on but have not been implemented. Democrats and Republicans alike acknowledge that there are tremendous efficiencies and growth opportunities to be found through tax reform. And while both sides seem eager to unwind automatic cuts to discretionary spending that hit at the end of the year, there is surely space to ink a deal that caps such spending in a more credible way than the Budget Control Act that was agreed to in August but everyone is working overtime to nullify.
THE END OF IDEALISM
After two years of hearing about $4 trillion plans, these efforts might sound like small potatoes. But Congress keeps failing to take action because it is starting with the hardest questions while lacking any real consequences if it fails to answer them. Starting small would break gridlock, signify progress, and get the two parties working together again. Only then would they be able to take on the larger, albeit more crucial, issues of entitlement reform and long-term structural balances. Small steps now would lift the safe haven curse and help America proactively solve its fiscal problems without ever triggering a crisis.
While campaigning politicians and doomsayer pundits may say otherwise, the biggest implication of the election is not whether it sets in motion the political balance required to get a big deal that avoids a fantasy fiscal meltdown in the near-term. Instead it is whether it sets in motion the chance to make any progress at all.
If the new power configuration in Washington--whatever it is--perpetuates the quixotic search for a grand bargain when it is not actually needed, the US risks achieving nothing and eventually losing safe haven status rather than shrugging off the curse. If, instead, November's results set in motion a lame duck session and 2013 environment receptive to more modest progress, the US will right its path on its own terms and avoid doing so under real market pressure later in the decade.