WASHINGTONUntil a few weeks ago, there was a disconnect between the financial disaster the United States faces and the battles its mainstream political actors were waging. The White House and Congress were busy expanding government while anti-government critics, including the tea party movement, were more interested in crusades than in restoring fiscal and regulatory sanity to the nation.
Thanks to controversial efforts by Wisconsin Gov. Scott Walker to cut some benefits and collective bargaining rights, as well as the $61 billion in federal spending cuts approved by the House of Representatives and the likely government shutdown if the Senate rejects them, the fault lines have been redrawn. The country is finally focused on what matters if the United States wants to avoid giving the impression that it is headed for Third World status.
Walker is doing what any governor in his place should dotrying to balance a budget projected to produce a $3.6 billion shortfall in the next two years, more than 10 percent of its expenditures. State taxes amount to 20 percent of the average income of Wisconsin residents. A big chunk of that money sustains a highly unionized public employee force that is well paid by comparison with the private sector.
Walker understands that Wisconsin and most other states are in financial doldrums. Until recently, few governors were willing to confront this problem head-on. Walkers example, along with the efforts of New Jersey Gov. Chris Christie, could now easily be replicated elsewhere.
Anyone who tackles the countrys financial imbalances will generate angry reactions. Even speaking out about them does so. A recent example were the attacks against financial analyst Meredith Whitney for warning on 60 Minutes that, given the calamitous situation of local governments, the United States will see 50 to 100 municipal bond defaults in the not-too-distant future.
Protesters in Wisconsin and elsewhere are angry that public employees and government programs should bear the brunt of fiscal prudence when massive bailouts have saved irresponsible banks and when executive pay is back to astronomical levels. They are right about the banks, but letting them fail would not have benefited Wisconsins underfunded public union pensions in any way. As for executive pay, in what way would private-sector bonuses beef up the budget of every city and every state in the country, or indeed of the federal government?
As the fight over the federal budget gathers pace, we will also see big confrontations between the reformers and the hostages to the status quo in Washington. Democrats are salivating over a possible backlash against Republican lawmakers if they force a government shutdown in early March by insisting on spending cuts. And complacent Republicans are dreading that very possibility in the face of the onslaught from the more energetic House Republican freshmen who recently passed that bold measure to reduce the federal budget by $61 billion.
The United States has been getting away with surreal levels of debt for far too long. If the dollar were not the worlds reserve currency, a major debt crisis would have exploded by now. The total outstanding federal debt has reached $14.1 trillion, almost the equivalent of what the economy produces in a year. Meanwhile, the annual deficit, a major source of that ever-mounting debt, stands at more than $1.6 trillion for 2011. It represents almost 11 percent of the nations gross domestic productwhich compares pitifully even with Greece, whose deficit in 2010 amounted to 8 percent of that countrys economy.
As a result of these imbalances, and of the illusion that unemployment can be brought down with government spending, the Federal Reserve has been printing dollars like crazyhalf of them to purchase Treasury bonds. The policy of easy money has contributed to skyrocketing commodity prices, whose ugly political, social and economic consequences we are only beginning to see around the world.
Given this context, the battle of Wisconsinwho would have thought?has acquired planetary significance. If the forces of reason prevail, the contagion could spread like wildfire, bringing sanity to Washington and across the nation. If they dont, the best chance in many years to reverse Americas slow decline will have been missed.