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.


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