Stop the Panic. It's Not 2008

Article excerpt

Byline: Roger Lowenstein; Lowenstein, a director of the Sequoia Fund, is the author of The End of Wall Street and other books.

The economy isn't as bad as you think. But higher taxes are our best hope.

Mark Zandi, an economist, called from the airport in Orlando with news: "The fundamentals of the U.S. economy are better than they have been in 15 to 20 years." As Zandi was delivering his ebullient tidings, the stock market was crashing for the third time in a week, on this day an awful 520 points. Proximity to Mickey Mouse can induce an undue feeling of cheeriness, but Zandi showed me the figures. American households have pared their debt--significantly. Corporations are rolling in cash. Banks are profitable and far better capitalized. By the way, even our government looks better than those across the pond. We have a central bank that responds to emergencies with purpose and vigor and a Congress--yes, a Congress--that wrote a bailout check when it was required. None of this has occurred in Europe, or will.

So before we get to all that went wrong--a debt-ceiling fiasco, a downgrade of America's credit by Standard & Poor's, Wall Street panic--it is worth pointing out that comparisons to 2008 are silly. Lehman Brothers is history; the run of failing banks will not be repeated. Nor are investors worried, per se, about a government default. Money is pouring into dollar assets. When the Treasury can borrow at just over 2 percent, it means lenders think they will be repaid.

Nonetheless, Standard & Poor's (which the administration foolishly blamed) performed a public service in sounding an alarm. It matters not whether the rating is "correct"--credit ratings are opinions about the odds of default. Routinely, they will be wrong. What matters is that S&P trumpeted a problem too long ignored. While private purses are on the mend, the federal budget has imploded. Part of this was deliberate--a response to the mortgage crisis and the recession. You can think of the stimulus, TARP, and the Fannie and Freddie bailouts as part of a process by which debts were transferred from a sick private sector to the public. Even at the price of temporarily harming its own finances, government had to provide the fix.

But S&P wasn't faulting the U.S. for patching the mortgage mess. S&P was reacting to the more systemic cause of America's budget problems--which are momentous. This cause, S&P noted, is "political," though "ideological" would be a better word. It springs from a fantasy of the Republican right that has been embraced by the U.S. Congress for fully a decade. This is the fantasy that governments can operate without revenue--more precisely, that a government presiding over an expanding economy as well as an aging population can operate without increases in revenue.

Ever since the Bush-era tax cuts of 2001 and 2003, the government has suffered from self-induced anorexia. Those oft-debated but never rescinded tax breaks have steadily drained the Treasury and added to its borrowings. Consider that in 2000, the total U.S. government debt (the net accumulation of its borrowings since the Revolutionary War) was $3.4 trillion. Today it is $11 trillion. This matters now because with the economy slowing again, the debt hugely constricts our options. The normal response to the bad jobs market would be increased deficit spending, but the government is already operating at a $1.5 trillion annual deficit (that's equal to a tenth of the GDP). It is borrowing half of what it spends. …