How about a little bargain?

The latest game of chicken between Congress and the White House over raising the debt limit reminds us how much our economic fate depends on political decisions. Now the two sides think they’ll get on with the business of solving the big issues –fiscal balance, entitlements, tax fairness– by December 13. Given the political rancor in Washinton, the chance of a grand bargain are pretty slim. But perhaps a small bargain is possible. That’s what some others are doing around the world.

Our dilemmas and shenanigans are not unique. In fact, in several of the world’s major economies, democratic and not, vital reforms are caught up in political fights. Some will eeek out small reforms that have long term implicaitons. Let’s take a look:

China: China’s investment and export driven model is grinding into old age To make a shift to consumption and services led growth, the new leaders need to stab their supporters in the back because exports, state enterprises and cronies will lose privilege in the new model. So, as you watch the Central Committee Plenary that starts 8 November watch for technical fixes like widening the currency spread and the interest rate float, corporatizing (not privatizing) state enterprises, making the government a shareholder and requiring that shareholders receive dividends, and allowing more private lending. These may not be big new programs, but over the longer term they take money away from state corporations and from government and put it in the hands of China’s consumers.

India: The Indian economy boomed for 20 years after the reforms of the early 1990s, but those reforms are almost played out. Facing elections next year, the Indian leadership shows more than their usual risk aversion. Finance Minister Chidambarum and the new Central Bank head, Raghuram Rajan, are talking up a new round of reforms, especially the deregulation of finance, retail and banking in order to promote entrepreneurship. There is a gradual process underway of reducing subsidies on fuel. As good as financial flexibility is, Indian politicians can’t touch the big problems of regulation and privilege, so the effects will be limited. Chance for a bold new round of reforms? Always slim, currently nil. But these technical fixes at least make some progress towards a more open economy.

Can we solve our problems this way? To some extent yes. A technical package might look like: a modest (say $50 billion) infrastructure bank with a bi-partisan board, capping tax deductions, some revisions to the corporate tax code on overseas income and on the treatment of interest vs. equity financing, and means testing social security and medicare for high income individuals. A series of fixes could actually put us on a better fiscal path, provide more incentives for investment and start rebuilding our infrastructure. It’s time to stop pretending we can cut big political deals. Let the wonks have their day.

Can the United States still solve its problems?

Throughout my career, I’ve represented the United States abroad in countries from China to Europe. We’ve made mistakes and had to explain them, we’ve had crises and scandals galore.  The bombing of the Chinese embassy in Yugoslavia for example, was terribly hard to explain.  Our own domestic problems –think of the savings and loan crisis, the Lewinsky affair or Nixon’s impeachment– were also matters of great interest around the world.  In bus stations, in cafes, or in meetings, leaders and ordinary citizens would ask:  what’s going on?  Their interest was not just curiosity; often, the outcome of a problem in the United States would affect their economy or impact their desire to rely on us for security and leadership.

When these questions came up, I’d usually reply that we have fractious politics, but in the end we face up to our problems and fix them.   Tax reform fights in the 80s, budget fights in the 90s; dot.com bubble in the 2000s.  We addressed the problems and moved forward, usually more resolutely than other countries might.  Muddling through was not the American way.

That’s why it’s distressing to see the current food fight in Washington.  Not only are we not facing up to our problems:  we’re not even arguing about the real issues.   We should face the budget issues, the costs of aging and of healthcare, the long term fiscal viability of our government, the mediocre education we provide  most students, particularly poor ones, or the fading promise of a better life from one generation to the next.  Instead we’re arguing about a health care law that’s already been passed and threatening to explode a default stink bomb right in the middle of our weak economic recovery.

Those of us who have been in Washington a long time know how these issues get solved:  leaders cut a deal and then dole out favors to their party members to get the votes.  Sometimes it means giving everyone a chance to vote against something –healthcare for example–before passing necessary legislation.  Sometimes it requires letting some party members in vulnerable seats vote against while strong arming others to ensure enough votes in favor.   Unfortunately, it appears now that the system has broken down, particularly among the Republicans where the leadership can’t strong arm anyone into anything.   Deal making and enforcing seem to be broken.

So, chances are we’ll get some kind of temporary fix to our self-created problems without really addressing the big issues.   Looks like muddling through has become the default option for the United States.