There are forces in play in 2011 that make for the perfect storm. How we face it in 2011 will determine the future of America.
One thing is certain, the great game of life in America is about to change. Deficits are skyrocketing at the state and federal levels. Our politicians have over-promised, and the government cupboards are bare. Unemployment has remained high, the economic recovery has been slow in taking off, and few politicians have wanted to face the stark budget realities that now exist.
The U.S. government has fallen deeper into the red in fiscal 2010 with net liabilities swelling as commitments on government debt and federal benefits rose. The latest U.S. Treasury Financial Report shows government’s liabilities exceeding assets by $13.473 trillion. That’s over a $2 trillion increase from the $11.456 trillion gap at the end of 2009.
At the state level, many states are close to insolvency. California bucked the national Republican trend going Democrat across-the-board in the November election. Jerry Brown has promised not to raise taxes without the vote of the people, but he’s already brought stakeholders together to stress California’s budget challenge. Governor Brown asserts that the state deficit may hit $28 billion for the 2011 fiscal year, and the state controller warns of IOUs.
To make matters worse, many cities have already declared bankruptcy over exploding employee pension commitments. More are in line to do the same.
But we face 2011 with a mix of optimism and dread. The players in control have changed in Washington and in many state governments. President Barack Obama is calling for compromise and cooperation, but Republicans were elected to curtail the deficits, stimulate the private sector economy, and decrease the size and cost of government. One side wants to drive the economy on the left side, the other the right. Compromise leaves you straddling the center divider with no progress. We need new solutions, not compromise.
The “lame duck” compromises produced some “wins” for the “Comeback Kid” president. Early indications of Republican courage are disappointing. Yes, they rallied to reject the $1.2 trillion omnibus spending bill, but settled for expensive, deficit-expanding compromise on the tax plan, extended the unemployment benefits, and launched a new entitlement plan for 9/11 first responders when they could have negotiated better deals in January.
So why am I still optimistic? I believe in the American people, our entrepreneurial innovation, and the resilience and competence of our workers. That strength and resolve will be tested and needed, because the core problems are so great that they can’t be avoided. The Bush tax cuts have been extended two years for all Americans. Early indications of good poll numbers on small business optimism, rising corporate profits and an increase in consumer spending promise hope for economic growth in the private sector. That translates into more government revenue and more jobs. It worked for Ronald Reagan in the 80’s, and it can work again.
But economic growth is only half of the solution. Cutting spending is never easy. Federal tax revenue doubled under Reagan, but he failed to cut government size and spending. Revenue doubled, but spending grew even faster. Arnold Laffer, a Reagan advisor, confessed, “When it came to cutting welfare payments and school lunch,…it was very hard. Someone would come over and say, ‘How can you cut school lunches?’ Reagan would reply, ‘I guess you’re right, I’ll tell them not to cut that one.’”
The new Republican House, responding to taxpayer pressure, has promised to curtail out-of-control spending, cut entitlements, downsize or eliminate unnecessary departments, and scale back the size of government. It’s also unlikely they’ll agree to bail out states “too big to fail” without rock-solid austerity programs in place.
There is motivation for them to do so. Republicans know that the Tea Party voters could mount a third party threat in 2012 if they don’t stand firm for the conservative principles they campaigned on. May they have the courage and resolve to guide us through the coming storm. May we have the wisdom to trade a costly dependence on government for a return to liberty, opportunity and personal responsibility before it is too late.