US News and World Report asks, “Who is handling its debt crisis better: Europe or the United States?” My answer follows.
In both Europe and the United States, the current public debt woes are attributable to mistakes made by political leaders going back more than a decade. In both cases the tremendous magnitude of the long-term debt problems has only become evident for all to see recently, by which time it was too late for the straightforward policy solutions that were viable options previously.
It is hard to judge whether it is Europe or the United States that has screwed up worse. On the one hand, Europe is now much closer to full-fledged crisis: the debt problems in Mediterranean members are virtually insoluble at current interest rates, are probably pushing Europe back into recession, and could well result in one or more countries forced to leave the euro. By contrast, there is no true fiscal crisis here yet; the world’s investors are still buying large quantities of US bonds at low interest rates.
On the other hand, the mistakes by US politicians are more gratuitously self-inflicted than on the other side of the Atlantic. In 2001, all we had to do was continue the fiscal progress that had been made during the 1990s: preserve the budget surplus and move on to address the longer term problems of social security and Medicare in a deliberate and balanced manner. Instead we recklessly enacted massive tax cuts and tripled the rate of growth of federal spending, in ways guaranteed to generate serious fiscal troubles in the decade of the 2010s and beyond. The debt-ceiling standoff last summer was but the latest self-inflicted wound, new evidence that the US political system is not functioning.
To be sure, euroland too has made serious policy mistakes. But one can sympathize with the difficulty of agreeing policy across 17 sovereign governments. The political fissures have been inevitable ever since 1999, when the euro members (then 11) adopted a single currency without a single fiscal authority, in what was nevertheless a historic and laudable enterprise. As they say, “why should anyone be surprised at the difficulty of getting 17 national legislatures to agree, when the United States cannot even do it with one?”
It is not too late for American politicians to enact the economically sensible policy: current short-term fiscal stimulus simultaneous with steps to lock in a long-run return to fiscal responsibility (which cannot possibly be accomplished solely by discretionary spending cuts, entitlement reform, or tax revenues, but rather should include all three). For euroland, unfortunately, even if the politicians could come together, there no longer exists an option for preserving the monetary union in quite the form originally envisioned.