Go to Top

How The Federal Budget Will Finally Get Fixed

The congressional supercommittee officially becomes a failure today, but while it could not come up with $1.2 trillion in budget savings, it did show us that there are exactly two ways in which Washington’s red ink can finally be stopped.

The first is what I would call Reaganesque realignment. If the 2012 elections provide a decisive edge to one party or another, that party will have a chance to impose the policies it favors to try to bring government spending back into some sort of sensible relationship to revenue.

The second is the European method – the dynamic that is playing out right now in Spain, Italy, Greece and other spendthrift eurozone nations. If we do not get our act together, bond buyers will eventually stop fooling themselves into thinking that our government’s debt is virtually risk-free, just as they have stopped believing that European sovereign debt is safe. The cost of further borrowing – as well as the cost of servicing earlier debts – will become prohibitive. At that point our political system will come up with a solution, like it or not, because there will be no other choice.

The supercommittee was destined to fail for the reasons I discussed in this space four weeks ago. It was designed to try to do something that simply cannot be done right now: convince the two political parties to willingly compromise on their core political objectives and policy beliefs. A lot of people are castigating lawmakers for their intractability, but it is probably unfair, or at least unrealistic, to expect them to behave otherwise.

Most House members come from districts dominated by their own party. Deviating from party orthodoxy does not earn respect; it earns a primary challenge from your party’s hardliners. Most senators, likewise, come from states that are decidedly red or blue. Only a few have a chance to run in the middle – and they can only appeal to that middle after they first satisfy their party’s base in the primaries. The system is designed to drive moderates out of elections before they even have a chance to run. That does not make compromise easy.

Beyond electoral politics, it is not Congress’ fault that Americans are divided fairly evenly into two camps regarding how they think their government should operate. It is even less Congress’ fault that Americans are not particularly rational or consistent. A lot of people who support Republicans say the government should spend much less money, including on entitlements, but they don’t want changes in their Social Security or Medicare benefits. A lot of Democrats want more jobs but less robust corporations. You can’t get from Point A to Point B, but these same voters blame politicians for failing to reconcile their own irreconcilable demands.

Neither Republican nor Democratic politicians will buck their party’s true believers, partly because they can’t and partly because they are true believers themselves. They really think the approaches they espouse are the right ones, and that the other side’s policies would bring the United States, or at least a large portion of its citizenry, to rack and ruin.

So the only way to get a solution is to have one imposed, either by voters or outsiders. If enough voters become convinced of the wisdom of, say, raising taxes or cutting spending, politicians who generally oppose that approach will eventually be forced to respond. If financial markets stop sustaining our current policies, our policies will change because there will be no other choice.

The big question is how much damage we will do as we pile up debt at around $100 billion every month while we wait to get things under control. There is a chance it will be considerable. That’s unfortunate, but like the supercommittee’s failure to reach a compromise, it is absolutely predictable.

Either we wait for the markets to save us from ourselves, or we save ourselves first. Next year’s elections will tell us which it is going to be.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.

The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.

, , , , ,