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My American Enterprise Institute colleague Desmond Lachman is an international economist who has — unfortunately — been spot on with his forecasts for the United States and Europe over the past few years.
He told me a year before the 2008 meltdown that we were headed for a fall, and he told me a year before the Greek collapse about the Euro crisis that loomed.
Now he is even gloomier, saying we face a serious crisis in European banks — and providing the startling information that the direct exposure to European banks by U.S. money-market funds amounts to more than $1 trillion, a staggering 45 percent of the sector’s assets, and that U.S. banks have exposure in European banks of $1.2 trillion.
If European banks, many of which are faltering right now, have to take a serious haircut from Greece’s troubles, they will be in crisis mode. Several other European countries will move to Code Blue if Greece defaults. And there are few signs that voting publics in Germany, France or other eurozone countries are prepared to continue to bail out any or all of them.
The bottom line for the United States: A European banking crisis means a truly serious blow to our already weak economy.
Lachman is one of the economists who say now is not the time for applying medium- or long-term fiscal reform to our short-term need to stimulate to avoid the worst case, which is more than a double-dip recession — it is a global depression. In an ideal world, we would couple sound short-term policy with a real commitment to longer-term debt reduction.
Perversely, perhaps, that grim reality gives me a bit more hope than I had before about the prospect for a breakthrough from the Joint Committee on Deficit Reduction.
If anyone can understand these dilemmas, and the strong inter-relationship between the European situation and our own economy, it is Sen. Rob Portman (R-Ohio), who has been both a budget director and a trade representative in addition to his service in the House and Senate. The same is true for Sen. John Kerry (D-Mass.), chairman of the Foreign Relations Committee.
Of course, the temptation to let partisan politics take over, leading to even more gridlock, remains high. On Sunday, Politico published the following chilling quote about President Barack Obama’s jobs plan: “‘Obama is on the ropes; why do we appear ready to hand him a win?’ said one senior House Republican aide who requested anonymity to discuss the matter freely. ‘I just don’t want to co-own the economy by having to tout that we passed a jobs bill that won’t work or at least won’t do enough.’”
In other words, denying the president a political victory trumps doing something that may help the economy and create jobs — even when it involves policies that have previously been touted by Republicans.
But Portman, and perhaps Reps. Dave Camp (R-Mich.) and Fred Upton (R-Mich.) and Sen. Chuck Grassley (R-Iowa), has to realize that we are now playing not with fire, not just with live ammunition, not even with real grenades, but with nuclear weapons. Failure to act in a strong and bold way could risk a depression that could last for years. The super committee may well have the fate of the world in its hands — and a solution is there for the taking.
What is it? It starts with the template that every bipartisan group inside and outside Congress has come up with: $4 trillion overall in deficit reduction over 10 years including major tax reform which lowers rates and adds about $1 trillion, a fourth of the overall package, in revenues. Combine that with a version of the president’s jobs program for the near term, and we have it.
Imagine if that kind of package got adopted by the super committee, especially by a vote of say, 10-2 or 9-3 — enough of a margin to enable it to survive its otherwise dicey prospects in the House, and likely to sail through the Senate. (Note to Sen. Jim DeMint (R-S.C.): no filibuster or other delay tactics allowed.)
The shock to conventional wisdom would be immense. Likely, U.S. markets would soar and there would be a comparable reaction abroad. It could actually provide enough of a positive shock to the system that it would change domestic and international consumer and business psychology, providing a major positive effect on the global economy.
Can all this be done by Nov. 23? Actually, the tax reform package can be put together pretty quickly, if the base-broadening is done by setting deduction limits rather than picking out winners and losers among the popular deductions.
If I had my druthers, I would opt for providing even deeper cuts in rates by adding a kind of consumption tax advocated by the Domenici-Rivlin Bipartisan Policy Center commission. There are many ways to restrain the growth curves of Social Security and Medicare without hitting core benefits for most recipients. Raising the Medicare age to 67 is feasible — but only if the Affordable Care Act is in place, providing alternative health insurance options for older Americans caught without jobs or Medicare.
None of this is easy. Doing it requires unnatural acts for politicians driven by the contemporary frenzy of our tribal politics. But success could make history for people such as Portman, Kerry, Camp and Upton.
So here is my question for all of you: Why are you there, if not to make history and improve the lives of Americans? You all have a rare, maybe unprecedented chance to do something remarkable. Don’t blow it.
Norman Ornstein is a resident fellow at the American Enterprise Institute.