Comeback America Page 5

  Today we live in a wired world that is more interconnected and interdependent than ever. Many of our imports, including oil, are critical to our economy. As a result, we sometimes must concern ourselves in the affairs of Europe, the Middle East, and elsewhere in order to ensure stability and protect our national interests. The key is to decide when it is and is not appropriate to do so. These issues deserve much more serious deliberation than they have been getting in recent years. One thing I am pretty sure of: General Washington would not have been happy with our predicament today, when our economic health is desperately dependent on the caprices of foreign lenders.

  The Constitution is perfectly clear on one aspect of foreign policy. It dictates that “the Congress shall have power … to declare war.” As the framers saw it, the business of making war was a joint responsibility of Congress and the president in his role as commander in chief. Typically, presidents ask the Congress to declare war. However, in recent years we’ve followed a “don’t ask, don’t declare” policy. What would General Washington have thought of our undeclared wars in Korea, Vietnam, the Persian Gulf, and Afghanistan? And what about our first preemptive war, in Iraq, a nation that had made no substantiated threat against us before we invaded it and overthrew its government?

  When our most recent President George—Bush 43—left office, we were fighting two undeclared wars at once. By failing to declare these wars, Congress effectively abdicated its constitutional responsibility to the president. I recognize that today’s world moves much more quickly than the world of the eighteenth century. Today, we have to respond immediately and decisively to sudden provocations—when terrorists attack one of our cities, for example, or when some rogue nation fires a missile at us. The president alone has the power and flexibility to defend our nation in a circumstance like that. All the same, we must not lose sight of our constitutional principles. We should never invade a sovereign nation, committing our blood and wealth, unless Congress has declared war.

  Why is that important in a book about fiscal policy? By failing to seek or consider a declaration of war, Congress and the president avoided important debates of the related costs, benefits, and consequences. Furthermore, Congress put itself in the untenable position of having to fund the conflicts as long as the president wants to keep troops in the field. Once you ask our military to risk life and limb, you must fund our forces even if there is no exit strategy and no clear end point; for example, the surrender of the country you declared war against.

  Americans were not rallied to support the wars in Afghanistan and Iraq, nor were we asked to pay for them properly through bond purchases and higher taxes. A more thorough process would have forced us to think hard about the potential costs and consequences and to help engender more public understanding and support once a decision was made. Commitments like these would have united us behind these causes—and, not incidentally, led us to pay for them responsibly. Americans should contribute directly and proudly to our war efforts. Once Congress declares a war, all of us should join the effort to win it.

  BIG GOVERNMENT, LOW TAXES

  Washington today no longer seems to work for “We the People.” Our founders sought to banish the elaborate European-style privilege and bureaucracy that they had escaped. While their experience had taught them to be on guard against corruption in politics, they nevertheless regarded engagement in politics as a high calling—as an opportunity to serve the public interest. Men such as George Washington, John Adams, Thomas Jefferson, and Benjamin Franklin lived in an age when it was possible to pursue politics not as a full-time profession, but as a form of civic obligation, a natural extension of their occupational roles as farmers, lawyers, or businessmen.

  Today’s professional politicians, as we often lament, are cut from entirely different cloth. While there are a number of dedicated and capable elected officials, too many current members of the U.S. Senate and House have grown out of touch with the real world through long careers in the federal government. If and when they do decide to leave office, many move into high-paying jobs as corporate or special-interest lobbyists in Washington. As a result, too few work for us; they work to advance their own careers. Yes, there are exceptions to this rule on both sides of the political aisle, but they are dwindling in number and influence. Some of the biggest exceptions who are fighting for more federal fiscal responsibility are Senators Conrad (D-ND), Gregg (R-NH), Lieberman (Ind.-CT), and Voinovich (R-OH), along with House members Hoyer (D-MD), Cooper (D-TN) and Wolf (R-VA). Former Senator Pete Dominici (R-NM) and others have also joined the fight.

  What about personal ethics and public morality? The founders of our nation were acutely aware of the way in which posterity might judge them. While they had no desire for celebrity, they all aspired to achieve fame, which, in their lexicon, was synonymous with honor. It was this striving for “lofty ambition,” to use the phrase of the French traveler Alexis de Tocqueville, that sometimes caused America’s leaders to go to extremes. One of the most ambitious of our Founding Fathers, Alexander Hamilton, was also one of the most obsessed with honor, an obsession that would cost him his life in his duel with Aaron Burr. Today’s political leaders are per haps too often seduced by another, less lofty, kind of ambition—the striving for power and personal influence for its own sake, not for the larger good of the society which they are charged with serving.

  No wonder many Americans have lost their hope and optimism for our nation. For the first time in our history, a majority of Americans believe that life for their children will not be better than their own. Why? In large part because in addition to straying from what made this nation great, America faces a range of large and growing challenges to our way of life that Washington policy makers are largely ignoring. America faces a serious leadership deficit—a problem we certainly didn’t have at the birth of our republic. That is our most serious deficit of all. How did we lose our way?

  I don’t have to tell you that this is no longer the America of 1789. We have made great progress on some imposing issues, such as civil rights and equal justice. But we have lost our way in developing the idea at the root of American political thinking in the early days—limited government. Since those days, our expectations have gotten more expansive. Over the decades, the growth of the government’s role in our lives came in response to real needs dictated by our development, including periodic economic crises. As we have learned over the years, measures adopted during a crisis can sometimes last indefinitely. The same can be said for public programs and tax policies that have outlived their usefulness or just don’t generate real results.

  That historical trend has left us with a big government that is constantly at war with a philosophy of personal responsibility and individual liberty that demands a limited government. We have created big-government programs, but we try to finance them with small-government taxes. That spells deficits and debt, and if we don’t reconcile these conflicting views of government, it will spell insolvency for the government and a worse life for many Americans. We have to balance our ideas about what government can do with our recognition of what it should do and what we are willing to pay for.

  A number of presidents had good reason for expanding the scope of government and ramping up federal spending. Franklin Roosevelt created Social Security and the other New Deal programs to help lift us out of the Great Depression. Lyndon Johnson created Medicare and built his Great Society to combat festering poverty and racial injustices. Social-welfare spending increased even more under Richard Nixon, who fought to put out the fires in America’s cities at a time of riots, unrest, and the Vietnam War. Ronald Reagan built up our defenses in his climactic battle against the “evil” Soviet empire. And Bush 43 launched two wars and bolstered our homeland defenses for the struggle against terrorism.

  For most of our history, even as the role of government grew, our nation took pride in being fiscally prudent. We did not run large deficits and accumulate significant debt burdens without a clear and compelling
national reason. That record lasted until the 1980s, when Americans began to see deficits and debt as acceptable, although not desirable. Some of our presidents fought this trend. Bush 41 and Clinton both broke campaign promises, cut spending, raised taxes, and imposed tough statutory budget controls. While they both paid a political price for their actions, they deserve great credit for having the courage to act in the best interest of the country. They did what was right rather than what was popular. That is what true leadership is all about.

  The statutory budget controls that were imposed in the 1990s remained in place until the end of fiscal 2002. They included, among other things, caps on discretionary spending increases, and requirements that any new spending or tax cuts be paid for within a ten-year period. (These were called the pay-as-you-go, or PAYGO, rules.) The statutory controls helped to take our country from large and growing deficits to large and growing surpluses. They also provided a basis for elected officials to say no to requests from constituents and special interest groups.

  Once PAYGO expired, however, Washington lost control. Bush 43’s serial tax cuts, on top of his greatly increased spending, destroyed the balanced budget that Clinton had turned over to him. While we faced large and growing budget surpluses when Bush 43 entered office, we faced huge and growing deficits when he left office. (See figure 3.) In the midst of the Bush cuts, his vice president, Dick Cheney, famously told Treasury secretary Paul O’Neill—as O’Neill recalled it—that “Ronald Reagan proved that deficits don’t matter.” (I believe Cheney was referring to the political cost of deficits. I certainly hope he wasn’t talking about the economic cost. If he was, he was flat wrong.)

  Figure 3 U.S. annual budget deficit or surplus as a percentage of GDP. The federal bottom line: The deficit trends are clear and concerning. The deficit for 2009 is about 10 percent of GDP and would not even fit in the figure above!

  The question is, can Obama turn around this financial disaster in the making? His first budget, for fiscal 2010, contained more truth and transparency about war costs, tax provisions, and health care reimbursement rates than Bush’s did. Our new president promises that his reforms, while expensive on the front end, will reduce costs and cut the deficit as time goes on. However, we have a long way to go before we can say that we are adequately disclosing and dealing with the huge sums that lie below the surface, off the balance sheet, and beyond the ten-year budget horizon used by the federal government. (Obama’s early months in office will be examined more closely in the next chapter.)

  Obama’s predecessors also faced pressures to keep the costs of government down—but some of them failed to meet that challenge. Johnson’s and Nixon’s reluctance to raise taxes to finance the Vietnam War and other federal spending helped lead to “stagflation”—rising unemployment and inflation—during the 1970s. Reagan’s “tax revolt”—unaccompanied by spending cuts—kick-started our nationwide addiction to deficits and debt.

  WHAT THE PAST TELLS US

  Perhaps because we are a young country, Americans tend not to pay much attention to the lessons of history. Well, we should start, because those lessons are brutal. Power, even great power, if not well tended, erodes over time. Nations, like corporations and people, can lose discipline and morale. Economic and political vulnerability go hand in hand. Remember, without a strong economy, a nation’s international standing, standard of living, national security, and even its domestic tranquility will suffer over time.

  Many of us think that a superpowerful, prosperous nation like America will be a permanent fixture dominating the world scene. We are too big to fail. But you don’t have to delve far into the history books to see what has happened to other once-dominant powers. Most of us have witnessed seismic political shifts in our lifetime. In 1985, Mikhail Gorbachev settled into his job as the Soviet Union’s young and charismatic new leader and began acting on his mandate to reenergize the socialist empire. Seven years later that empire collapsed and disappeared from the face of the Earth. Gorbachev runs a think tank in Moscow now.

  In a sense, the larger world is starting to resemble the nasty and brutish life that long has characterized the corporate world. Just ask Jeffrey Immelt, chairman and CEO of General Electric. Of the twelve giants that made up the first Dow Jones Industrial Average in 1896—all of them once considered too big to fail—only GE remains. The other towering names of the era—the American Cotton Oil Company, the U.S. Leather Company, the Chicago Gas Company, and the like—all have faded away. And as GE stands against the winds of today’s financial challenges, ask Immelt whether there is such thing as a company that is too big to fail.

  I love to read history books for the lessons they offer. After all, as the homily goes, if you don’t learn from history, you may be doomed to repeat it. Great powers rise and fall. None has a covenant to perpetuate itself without cost. The millennium of the Roman Empire—which included five hundred years as a republic—came to an end in the fifth century after scores of years of gradual decay. We Americans often study that Roman endgame with trepidation. We ask, as Cullen Murphy put it in the title of his provocative 2007 book, are we Rome?

  The trouble is not that we see ourselves as an empire with global swagger. But we do see ourselves as a superpower with global responsibilities—guardians if not enforcers of a Pax Americana. And as a global power, America presents unsettling parallels with the disintegration of Rome—a decline of moral values, a loss of political civility, an overextended military, an inability to control national borders, and a growth of fiscal irresponsibility by the central government. Do these sound familiar?

  Finally, there is what Murphy calls the “complexity parallel”: Mighty powers like America and Rome grow so big and sprawling that they become impossible to manage. In comparing the two, he writes, one should “think less about the ability of a superpower to influence everything on earth, and more about how everything on earth affects a superpower.”

  A superpower that is financially reliant on others can be vulnerable to foreign influence. The British Empire learned this in 1956, when Britain and France were contesting control of the Suez Canal with Egypt. The Soviet Union was threatening to intervene on Egypt’s side, turning the regional dispute into a global showdown between Moscow and Washington. The Eisenhower administration wanted to avoid that, and the United States also happened to control the bulk of Britain’s foreign debt. President Eisenhower demanded that the British and French withdraw. When they refused, the United States quietly threatened to sell off a significant amount of its holdings in the British pound, which would have effectively destroyed Britain’s currency. The British and French backed down and withdrew from Suez within weeks.

  The U.S. dollar has never come under a direct foreign attack (though its vulnerability is growing). A direct foreign attack would result in a dramatic move away from the dollar. That would lead to a significant decline in its value, as well as higher interest rates. This is often referred to by economists as a “hard landing.” In lay terms, it’s more like a crash landing. Still, Americans have become intimately acquainted with the shocks of financial instability. Americans of a certain age still vividly recall the depths of the Depression in the 1930s and the chaos of inflation and long gasoline lines during the oil shock of the 1970s. We will also remember the financial collapse that began in 2008, and we pray for nothing worse. Some of our smartest financial thinkers are praying right along with us. “I do think that piling up more and more and more external debt and having the rest of the world own more and more of the United States may create real political instability down the line,” investor Warren Buffett has said, “and increases the possibility that demagogues [will] come along and do some very foolish things.”

  CONNECTING PAST AND FUTURE

  This is another major lesson we must take from the history books: No power is too big to fail. The greatest of nations must demonstrate again and again that it is strong, smart, and flexible enough to keep its predominance.

  Our twenty-first-cen
tury economy can be our most productive and our future can be better than our past—if we return to the principles and values that made us great. In the expanded international arena, money, goods, people, and information all move freely and rapidly. Just look at where our T-shirts, technology, and cars are manufactured, and who buys our aircraft, software, and surgical systems, and you can see that we are no longer a self-contained nation. The world’s growing interdependence, with all of its benefits, also challenges American policy makers to find new ways to form international partnerships to achieve our vital national goals. I don’t need to tell you that financially predominant nations have more cooperative partners. Needless to say, governments that aspire to the role of global superpower are not drowning in debt.

  Transformation has always been an American strength. The impulse to remake and improve our lives is woven into our national fabric. Thomas Jefferson, writing to his friend James Madison in December of 1787, confessed, “I am not a friend to a very energetic government. It is always oppressive.” But even a staunch believer in limited government like Jefferson realized that governments must change with the times. Writing in 1816, after serving two terms as president and reflecting on America’s rapid westward expansion and increasing involvement in the world economy, he proclaimed, “We might as well require a man to wear still the coat which fitted him when a boy, as civilized society to remain ever under the regimen of their barbarous ancestors.”

  As a nation, we need to follow both of Jefferson’s impulses. We need to support those government programs that truly do help us achieve the core aims spelled out in the preamble of our Constitution. At the same time, we need to weed out those programs that are either ineffective or contrary to our national goals and better target some of the ones that remain. We need to be realistic about what we can afford and sustain over time. As Jefferson also said, “It is incumbent on every generation to pay its own debts as it goes.” It’s time for tough choices and tough love in Washington.