Fiscal Crunches Are Resolved When There’s No Alternative

I was watching my boss John Podesta on Charlie Rose last night, but found myself really struck by what David Brooks said, namely his voicing of an all-purpose sense of despair about the long-term fiscal deficit: “I just don’t see a way out of it.”

I’ve said things like that myself in the past, but I think it’s wrong. The way out is actually pretty obvious. You need a combination of tax increases and overall spending cuts, with defense and Medicare on the table. This doesn’t happen because it’s politically impossible. But it’s politically impossible because it’s not really necessary. You can see the lines on the charts easily enough, but it’s just not the case right now that there’s a crisis in the market for US treasury bonds that’s forcing action. And the action that would be needed is the kind of unpopular action that nobody would undertake unless forced.