Thursday, October 06, 2011

Two types of (fiscal) crazy

The first was short-term and charged by contemporary partisanship—a sort of temporary political insanity. Debt limit brinkmanship from both parties revealed exactly how difficult it would be for America's political system to resolve even the most basic fiscal policy disputes, much less make substantial fiscal changes. When debt deal talks began, S&P announced that it expected Congress to work out a deal worth a minimum of $4 trillion in deficit reduction—the minimum necessary to stabilize the country's debt over the medium term. But after months of bickering, Congress only managed to come up with about $2.5 trillion in cuts—and only at the very last minute. Which explains why S&P now believes that "the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges."

But the S&P's downgrade notice also pointed to a more fundamental form of crazy: the long-term build-up of federal debt scheduled to come from America's entitlement system—and the broad refusal to do anything about it. It's not just that the deal failed to knock the minimum dollar-figure off the deficit. It's that it failed to address its root cause: "The plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability." Entitlements—and their unsustainable financing systems—in other words, are the core of the long-term problem.

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