A parachute for Americans on their fiscal cliff
The hard decisions in the fiscal cliff negotiations between the GOP and Democrats would be easier if lawmakers could point to other nations that have seen the benefits of fiscal discipline in lifting an economy.
It’s a rare moment when a nation, much like a prodigal son, admits it has borrowed too much and then sets its finances in order. Americans now mostly agree their national debt is a threat to the economy. But the “fiscal cliff” negotiations in Washington show they don’t yet see the long-term benefits of belt-tightening.
Talks between Democrats and Republicans still mainly focus on which Americans will lose and which will gain. Whose taxes will go up? Whose entitlements will be cut? The recent election didn’t make that task any easier.
One estimate, made by the International Monetary Fund, is that fixing America’s fiscal imbalance will require a one-third cut in government benefits and a one-third rise in tax revenues. The IMF should know. Its job for decades has been to force overspending nations to set their finances in order if they want its seal of approval for more foreign loans and investment.
The IMF’s tough love has worked pretty well in many nations to get them to fess up to past profligacy and then sign on to a measured pace of budget cuts, better regulations, and new revenue. Much of Latin America and parts of Asia and Africa have seen that light.
America’s current debate would benefit from the IMF’s main lesson about the future promise of fiscal discipline: A nation that takes its lumps quickly won’t regret it. Or rather, the admission of past errors and embrace of temporary sacrifice will bring out the fatted calf of economic growth.