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The Culture War Over Our Fiscal Crisis

There seems to be no shortage of explanations these days for America’s political polarization: addiction to outrage, populist suspicion of elites, a psychological preference for revenge over compromise, racial and gender differences, even an epidemic of loneliness. And while some of these certainly have intensified the squabbling, it can’t be ignored how closely the rise of partisan acrimony has paralleled the country’s worsening fiscal crisis.

Ever since the fight over who rightfully won the 2000 presidential election, which to many seems like when normal political bickering escalated into something different, the national debt has grown fourfold from $5.5 trillion to almost $22 trillion, or an astonishing $1 million per taxpayer. Increasing state and city liabilities for unfunded public pensions, which the Wall Street Journal recently estimated to be larger than the entire German economy, have added trillions more.

Contributing even further to America’s growing debt problem are the predicted insolvency of its two biggest entitlement programs. According to their own trustee reports, Social Security will lack adequate funding by 2034 and Medicare by 2026.

The connection between fiscal stress and political polarization is not hard to understand, once we remember that most democratic elections are vote buying exercises. Those on the left are usually more blatant, offering voters some new or enhanced entitlement. But the right has its own expensive priorities and often feels compelled to counter with a leaner version of the Democratic agenda. Both parties claim they can fully pay for their respective promises but ultimately they always end up charging much of it to future generations.

Historically, this vote-buying system works reasonably well—until the inevitable point when the interest on the accumulating debt begins to limit what the parties can realistically offer. And as it becomes clear that government will have an increasingly difficult time not only funding new benefits but making good on those previously promised, factions instinctively mobilize to protect their respective gains.

Those who have become dependent on government largesse or who have bet their retirement security on public pensions or who simply lack the skills to prosper are quite naturally attracted to redistributionist ideologies. Those who already pay most of the income taxes (as well as those who aspire to someday be similarly well-off) prefer for government to raise needed revenue by incentivizing work and investment.

Advocates of the latter can at least cite historical precedent. From the 1920s tax reforms of Treasury Secretary Andrew Mellon to President Reagan’s supply-side economic policies, dramatically cutting taxes and regulation has increased government revenues in the past.

But as Ray Dalio argues in his recent book Principles for Navigating Big Debt Crises, it is possible for a country’s fiscal holes to become so deep that a growth-oriented tax policy cannot adequately fill them. This is the situation that America (and much of the industrialized world) has backed itself into over the last two decades, and it goes a long way towards explaining the bitter political divide.

Despite the benefits of the 2017 GOP tax bill, concludes Goldman Sachs chief economist Jan Hatzius, the long-term fiscal outlook for the United States is still “not good.” Hatzius predicts that annual federal deficits will more than double within the decade to $2.05 trillion (7 percent of GDP) and warns that the country’s very stability is at risk when the next recession comes. Mercatus Center senior research fellow Veronique de Rugy nervously agrees. The continued rise in federal debt is “shocking,” she says, “considering the economy is growing faster than it has for a while. Even worse, there’s no end of that red ink in sight.”

As for states and cities, a December 13 report by the U.S. Government Accountability Office (GAO) predicts a stormy fiscal future for many of them, with Medicaid and pension expenses continuing to outpace tax revenues. Indeed, the Pew Foundation has estimated that even if state pension portfolios were to somehow grow at an historically high rate of 6.5 percent a year, they would still end up $1.7 trillion short of their obligations.

In other words, all levels of government are set to fall short of fulfilling their promises, no matter how much further unemployment goes down or the stock market goes up. And as the window to address this problem narrows, both the intended beneficiaries of government programs and those likely targeted to make the programs solvent are doing their best to undermine each other’s credibility, even over issues that have nothing to do with money.

All this is not to suggest that every extreme political position is based on a calculation of how it would impact the America’s fiscal crisis. But at the same time, it isn’t hard to predict where someone stands on almost any issue once you know how he or she relates to public programs: as a potentially vulnerable beneficiary or as a potentially besieged taxpayer.

Many knowledgeable observers, including Dalio, would argue that such political squabbling is ultimately pointless, as the outcome of America’s fiscal crisis is pre-ordained. History tells us that the only socially acceptable way for governments to manage unsupportable debt is by spreading the pain as broadly as possible, forcing every interest group—bondholders, taxpayers, recipients of public programs, government employees—to take a hit. That’s not because this approach is fair, but because shared sacrifice is the only way to stop a verbal civil war from becoming a real one.

Unfortunately, it is also true that what constitutes an equal sharing of local, state, or federal liabilities is open to considerable interpretation. A “fair” distribution of financial pain is, in the end, a compromise among elected officials who owe their positions in large part to the activism of their respective party’s most extreme and uncompromising voices.

Once more, the electorate’s eventual reconciliation to burden-sharing will open new political divisions that also must be healed, as each faction comes to terms with what it will sacrifice for the greater good. Do public employee unions do their part by accepting reduced retirement benefits or signing on to education reforms like school choice? Do taxpayers do their part by consenting to higher levies or reduced public services? Do Social Security recipients want lower monthly checks or a higher retirement age?

We are already seeing some of these intra-factional controversies play out in places like Atlanta, Detroit, Jacksonville, and Lexington (Kentucky). In these fiscally distressed cities, government workers, their pensions threatened by the prospect of municipal bankruptcy, have had to decide which is worse: salary cuts, workforce reductions, or offering fewer benefits to new hires. And in struggling Illinois towns like Harvey and Rockford, where local courts have ruled onerous pension obligations inviolable, it is the taxpayers who are choosing what to give up: the local library, summer recreation programs for the kids, or well-maintained roads.

There are also many who have profited from America’s debt problems (even illegally) and have no interest in solving them. As with company officials and union leaders who have successfully lobbied for unwarranted government benefits to doctors and home health care providers who annually commit an estimated $41.1 billion in Medicare fraud, many know that the resolution of America’s financial crisis means more than a reduction of accustomed income.

Just as Lehman Brothers and Bear Stearns had to be sacrificed during the subprime mortgage crisis as a warning to future generations not to repeat the same mistakes, so too will spreading the fiscal sacrifice around require the visible punishment of its worst abusers. The most unfairly subsidized industries, the most extravagantly pampered public employee unions, the most irresponsibly indebted cities, the most dishonest medical practitioners, and perhaps even one or two profligate states will have to serve as cautionary examples.

A day is coming when, despite all these obstacles, the public debt will have grown so large that bond investors will no longer support it. This will finally force all factions to negotiate a shared sacrifice. It will, once the hysterical screams have subsided, allow the strident political rhetoric to at last ebb. The bad news is that this collective economic pain will be far greater than it would have been had such an agreement been possible today.

Dr. Lewis Andrews was executive director of the Yankee Institute for Public Policy at Trinity College from 1999 to 2009. He is writing a self-help book based on the spiritual wisdom of America’s early college presidents.

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