If billionaires, bankers and politicians extract one insight from the World Economic Forum, let it be this: Western civilization is on the verge of a catastrophic failure to balance its short-term and long-term interests.
Market turmoil in Europe has eased a bit and the U.S. economy is looking healthier than expected as the global elite converge on the Swiss ski resort of Davos for five days of speeches, meetings and cocktail parties. But as German Chancellor Angela Merkel rightly noted at the forum yesterday, world leaders have yet to act on the lessons of a financial crisis that began in 2008 and has yet to really end.
In the U.S., political leaders are focused almost exclusively on the short term, to the detriment of the long. The bank bailouts of 2009, together with various kinds of stimulus - - insufficient as they may have been -- helped fend off a full-blown depression and at least partly insulated millions of Americans from economic pain. But the bill for such measures has to be paid. With a presidential election coming and the banking lobby fully recovered, the U.S. isn’t likely to make any progress toward a realistic plan to contain government debt or repair a financial system that remains highly vulnerable. Last year’s budget deal will trim only $2.1 trillion over 10 years, just a fraction of what’s needed.
In Europe, meanwhile, the region’s most powerful leader -- Merkel -- is focused on the long term to the detriment of the short. She and her ideological brethren at the European Central Bank are pushing for a fiscal compact that would rein in government debt in the 17-nation euro area. They are placing this laudable goal ahead of urgently needed measures such as a reckoning of how much strapped countries can actually afford to pay, a recapitalization of European banks and the construction of a credible financial firewall to protect solvent governments against contagion. As a result, uncertainty is paralyzing markets, weighing on the global economy and threatening a breakup of the euro that could make Merkel’s long-term plans irrelevant.
The challenges facing the U.S. and Europe stem from the same phenomenon: The financial elite, investors and taxpayers alike have become too dependent on government to protect them from the consequences of their actions. At the same time, they haven’t been willing to pay the full cost of the services government provides. The most visible symptom is a buildup of sovereign debt larger than any the developed world has seen since the aftermath of World War II. This week, the International Monetary Fund projected that by 2013, the average gross debt burden of developed countries will exceed 110 percent of annual output, a level that represents a serious drag on future economic growth.
Reversing this process will be extremely difficult. It requires society to decide who will pay, a task complicated by growing inequality and political polarization visible in the standoffs between Democrats and Republicans in the U.S., and between Germans and Greeks in the euro area.
No group can solve the problem alone. Future retirees will have to accept benefits less generous than what they’ve been promised. Bankers will have to give up the taxpayer subsidies that boost their profits and paychecks. Everyone will have to live with higher taxes, smaller government or both. Plans already on the table, including the $4 trillion Simpson-Bowles deficit-reduction package in the U.S. and the creation of collectively backed sovereign bonds in the euro area, would be steps in the right direction.
Davos and concrete action don’t traditionally go hand-in-hand. But, to crib a line from economists Carmen Reinhart and Kenneth Rogoff, this time is different. The business and political elites gathered at high altitude have a host of reasons to set narrow interests aside and work to solve issues crucial to preserving the economic prosperity on which their positions depend. If they opt for nothing more than talk, the disappointment will be deafening.
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