The dominant mood in America today is one of anxiety without pause. Millions of decent, self-reliant, regular Americans who had begun to fear that the prolonged recession means the American dream is over for them now brood that their children and even their grandchildren are also to be denied the prospects of the good life they took for granted just a decade ago.
Once, the vast majority thought they were in the middle class, not rich and not poor. Today, more and more Americans are starting to identify themselves with lower economic groupings and see no prospects of moving higher, whether in terms of job opportunities or earnings. The fear has grown that years of hard work will no longer translate into a better life for themselves and their families. The new normal is that millions of them are facing the risk, or the reality, of falling out of the middle class, losing all that this once meant in America—financial independence, sending your kids to college, having equity in your home, choosing where you live. Today, people in their 20s are hard-pressed to get jobs, and those who do are taking them at incomes lower than they ever imagined. For those who are surviving as middle-class families, they are facing years of financial insecurity.
Middle-class wages are stagnating or worse. Median household income in the United States is now about $50,000 a year, 5 percent less than it was in 2000. There is a palpable sense of a country that is becoming more and more unequal. From 1989 to 2007, the top 1 percent of the population gained 56 percent of all income growth, while the bottom 90 percent gained just 16 percent. The only ones maintaining their financial standards are the educated upper classes. Middle-income families have been pressured by advancing technology, offshoring, and growing unemployment, and white-collar professionals have been forced into lower-paying or part-time work. As author Barbara Ehrenreich starkly put it, those between the ages of 40 and 50 are "too old to hire, too young to retire. . . . This is an apocalyptic situation."
The result is a widespread, populist anger in the country, mostly directed at Washington and at the Democrats. The Republicans not only won a majority in the House of Representatives in the midterm elections but had stunning success at the state level—not only new governorships but some 675 legislative seats, representing the biggest victory for any party in the state legislatures since 1938. The Republicans will now control 25 legislatures, compared to 14 before. The Democrats will now control only 16, compared to 27. The Republicans will have control of the governor's mansion and both legislative chambers in 20 states, compared to only nine before the midterms. Their success has been particularly evident in the industrial heartland states such as Pennsylvania, Ohio, Indiana, Michigan, Wisconsin, and Minnesota.
The congressional Republicans promise to launch a full-scale attack on the federal deficits they helped to accumulate under the eight devil-may-care years of the George W. Bush presidency. They recognize that debt is a major feature of our downcast mood; accumulation of debt by the U.S. government is at a historically unprecedented and essentially unsustainable rate. Other than during and after World War II, the United States has not been so highly indebted since record-keeping began in 1792.
There are warning signs all around us of the dangers of America's breakdown of fiscal discipline. China downgraded its credit rating for American debt; South Korea refused a new trade deal; and the bulk of European and Asian nations joined in protest against the Federal Reserve's monetary policy of quantitative easing, which they interpret as printing more money to suppress the value of the dollar in order to make our exports more competitive in their countries.
The Republicans have so far little to say that is convincing about the other major depressant—jobs and output—relying simply on the efficacy of tax cuts. Getting Americans back to work and paying taxes is the single biggest ax we could take to chop back debt. Accelerating economic growth over the next 20 years by just half a percentage point would cut the deficit in half. Clearly we have to do both—cut and cut, and grow and grow.
Action is urgent. Rather like the closing reels of B-list Western movies, we have two columns of cavalry with flashing sabers riding to the rescue. The one we might call the official brigade, commissioned by President Obama, is a bipartisan panel of lawmakers and others headed by Erskine Bowles and Alan Simpson. There is no final agreement yet, but on the table is a stunning $1 trillion in tax hikes, plus much more in spending cuts through 2020, all aimed at reducing deficits by $3.8 trillion, with mortgage deductions ended, the Social Security retirement age raised two years to 69 by 2075, and an increase in the gasoline tax of 15 cents a gallon.
The unofficial column, without lawmakers, is chaired by former Sen. Pete Domenici of New Mexico, the longtime senior Republican on the Senate Budget Committee, and Alice Rivlin, a former budget director for both Congress and President Clinton. The unofficial brigade has a more convincing plan, combining huge cuts in spending with necessary measures to grow the economy—including a bold one-year relief from Social Security payroll taxes (though, given huge unemployment rolls, it would be even better for jobs and business planning to declare a three-year holiday).
The Domenici-Rivlin program includes other excellent proposals, such as a radical and overdue reform of our tax system for both individuals and corporations. It would end most deductions and credits while simplifying the rest in a way that would enable reductions of individual and corporate tax rates. Nearly 90 million households would no longer have to file returns. To reduce the debt, they would supplement the proposed income tax changes with a 6.5 percent debt-reduction sales tax. Similarly, they would strengthen Social Security by gradually raising the amount of wages subject to payroll taxes and slightly reducing the growth and benefits for the top 25 percent of beneficiaries, while raising minimum benefits for long-term, low-wage workers, and indexing benefits to life expectancy.
The other major proposal would control healthcare costs by reforming Medicare and Medicaid while starting in 2018 to cap and then phase out the tax exclusion for employer-provided healthcare.
Naturally, all sides of the political spectrum have objected. But there will be no smooth walk to fiscal freedom. They can argue all they like, but nobody can argue away the danger—not with the deficit exploding, going from a surplus of 1 percent of GDP in 1998 to a deficit of 3.2 percent of GDP in 2008. During this same period, public debt per capita increased by 50 percent from $13,000 to more than $19,000. Both indicators have risen sharply since.
To climb out of the fiscal hole inevitably means inflicting pain. No area of government spending can avoid being scrutinized or having its expenditures reduced. Nobody will be able to protect their sacred cows. The people understand there will have to be trade-offs, but they look for political leadership.
This means telling both sides what they don't wish to hear: Conservatives will have to accept tax increases and defense cuts, and liberals will have to accept the paring of entitlement benefits that are no longer affordable—especially public pensions grotesquely out of line. The kind of debt service we face would otherwise eat up the stock of private capital available to finance vital investments, and unchecked government deficits will ultimately crowd out federal spending for research, education, and infrastructure.
We are at a historic turning point that mandates getting our fiscal house in order or suffering dramatic domestic and international consequences. The political center, which voted like Democrats in 2008, voted like Republicans in 2010—but both parties know they will suffer if progress is not made on the central issue of excessive debt.
The Republicans must resist the temptation of victory. They have not won a mandate for obstructionism or for partisan investigations of half-baked charges. They must discipline themselves to move to the center where the people live. Otherwise they risk having people believe that they are motivated only by blind anger. Blocking everything will boomerang against the Republicans, just as stupidly shutting down the government hurt them in 1995, the last time they were in the majority in the House. They must design some kind of useful grand bargain on the economy. If they do, they will establish their credibility as a governing party and not just as a political party.