Simple Ways to Address Debt, Create Jobs, and Improve U.S. Financial Credibility

When the debt ceiling discussions began, months ago, the country appeared to be split between two contrary opinions.  Most conservatives had become convinced that the U.S. was “broke,” and that only immediate and titanic cuts in spending could possibly save us.  Most liberals were convinced that “debt and deficit” problems were not real, and were simply a ploy for conservatives to cut spending.

Although there still seems to be widespread confusion about the issues at hand, it seems like the general public has learned a good deal in the runup to the Aug. 2nd deadline (if not as much as one would hope).  We’ve learned, for example, that sovereign debt ratings, not just our ability to borrow, are important — and at stake.  We’ve learned a good deal about the sources of our deficits and debt — even if we still disagree about how to handle them.

I find, in talking to liberals and conservatives on this issue, that certain simple — but effective — ideas can appeal to both sides, without being caught up in the “grand narratives” that characterize each side in our Congressional stalemate. One of them, the idea of tying job creation to overseas tax repatriation holidays, I discussed in a previous post (and will simply list here).  But there are others, and I would like to suggest that implementing even one or two would radically change the game, by changing the confidence level of citizens, companies, and the world in our ability to address our issues.

I would further suggest that our largest problem today is not a crisis of confidence about U.S. indebtedness.  Americans and the world at large lack confidence in the ability of Americans to govern their way out of the problem.  The global markets, and the bond market in particular, want U.S. sovereign debt to remain the risk-free benchmark, and despite occasional posturing, nobody is eager to displace the U.S. dollar as reserve currency, given the uncertainty and dislocation that would inevitably create, during a time of sluggish economic growth.

What we need to demonstrate is not, I would suggest, a complete solution to our deficit and debt problems, but a credible start and follow-through.  President Obama has been talking about “significant downpayments” on deficit reduction for precisely this reason.  It’s not a new idea.  It’s also the strategy of every consumer with significant debt — you can’t simply tell the credit card company you’re trying to make payments, you have to establish a track record of actually doing it.

There are reasons, of course, that the party “out of power” would try to block even simple, common-sensical ideas.  Winning the next election means not giving up points to the other side, if possible.  But I hope we’re close to the point where Americans start demanding progress and solutions — not the ultimatum-style “solutions” we’ve seen daily in the debt ceiling “negotiations,” but concrete steps.

Here are a few that seem to have bipartisan appeal, in my discussions with folks lately.

1.  Ban “off budget” expenditures

A large part of our current deficit (and thus, part of the massive expansion in our national debt), is the result of conducting two full-scale wars and innumerable global “operations,” completely outside the normal budgeting process.  I’m sure there are other off-budget expenditures as well.  These should simply be banned.  Putting everything on the budget will force us to have more honest discussions about spending, taxes, and debt.  In particular, it will force us to consider carefully the cost of going to war, and how to pay for it.   We can include some common-sense exceptions:  direct attacks, such as Pearl Harbor, demand immediate responses which may not be budgeted, but Congress could be required to pass an amended budget within 30 days.

2.  Resurrect the “war bond,” and “war tax” when needed

We forget that we used to ask Americans to step up, patriotically, when we went to war.  We issued “war bonds,” borrowing money from ourselves.  We may not be able to finance a contemporary war, where we can easily spend hundreds of billions to trillions of dollars, purely through war bonds, but the mere issuance of war bonds would give Americans a stake in the decisions made — to go to war, to continue at war, and how much we spend on war-making.

We also tend to forget that we used to tax ourselves specifically to pay for war expenses.  After the Vietnam war, we instituted a supplementary tax whose proceeds went to retiring war debt.  We can, by some estimates, do the same thing in six short years for the current debts incurred in Afghanistan and Iraq.  It would be the patriotic thing to do, and would increase American and global confidence in our solvency and fiscal sobriety.

3.  Tax holidays must be met with job creation

I discussed this in more detail in my last posting.  But the basic idea is that when we give significant tax holidays or breaks to American companies, these benefits should be tied to job creation.  Not by empty promises or economic rhetoric, but mechanistically, by tying the tax abatement in question to demonstrated creation and retention of new jobs.  Job creation is essential to the health of American communities, and it’s essential to the economic growth that will allow us to reduce long-term debt.

Beyond these ideas, which seem to have bipartisan appeal, we must come to an agreement about balancing tax levels and spending cuts.  In similar situations around the world, long-term debt reduction and deficit control has been accomplished by a mix of both, ranging from 1/3 vs 2/3rds, to 80/20.  The Gang of Six, or Simpson/Bowles plans were consistent with this ratio, and need to be seriously revisited by both sides.  I offer no “magic bullet” for getting this to occur, and that — not debt reduction — represents the true challenge of our lifetimes as Americans.