To the President and Congress,
I agree with President Obama that a balanced approach is necessary and required immediately. I disagree that the Reid plan he supports is balanced. Nor is the Boehner plan. But more on those later.
I have recently relocated back to the US after living in Singapore for most of the past 7 years, where I was a business school Dean and Professor. During our time overseas, I observed the US from afar, worked with leaders in international governments and businesses, spoke at innumerable international conferences, wrote several business books, extensively followed international press coverage, and watched with great frustration as the reputation of the US sharply declined. There is no question that the current debt situation is and has been an unnecessary crisis, yet here we are on the brink of the unimaginable.
Financial markets evaluate credibility and strength based on a combination of tangible and intangible factors. Tangible factors, of course, are those that we can readily measure, such as the revenues and spending components of the Federal budget. The intangible factors, however, are equally, if not more important. These include our reputation, trust in our goodwill and judgment, and belief that we know what we are doing. Both tangible and intangible factors have been seriously harmed since 2000. The tangible factors can be fixed relatively more quickly, starting with a serious (and now accelerated) effort from both parties to put forth a credible, long-term plan for solving the debt crisis. But the intangible factors, such as our reputation, take decades to develop (one could argue it has taken 230+ years) and, as we are witnessing, a few short years to destroy. Once the intangible reputation is gone, it will take many more decades to even have a chance to regain our once leading reputation as a force for good and a reliable economic and political power on the global stage, if we even return at all. A short-term, politically expedient tangible approach that temporarily raises the debt ceiling only when tied to spending cuts will only hasten the dramatic decline of the U.S.'s reputation. Unfortunately, the two current plans are politically expedient and, as a consequence if either is enacted, risk further harm to our international reputation, perhaps irreparably.
Neither of the solutions currently on the table are likely of the financial magnitude or composition needed to prevent a credit downgrading. Among the problems with the current proposals, it is clear to almost every credible political and business leader around the world, except select members of Congress, that a solution lacking a revenue (re: tax) component is fiscally irresponsible and economically unsound. To be blunt, adhering to a no tax pledge is juvenile, silly, and unquestionably disastrous for the long-term economic health of the US. You need to solve this immediately, but NOT with the two proposals currently on the table. President Obama was correct in seeking more than the $1 trillion in taxes that he sought last week (although even those taxes were not sufficient in size). The Reid plan as currently conceived does not include taxes, which is a significant mistake in its own right. The Boehner plan is even worse, particularly since it forces the issue back into the political arena in 2012 during the election season when politicians favor platitudes and promises of economic gain without sacrifice, and the average American is easily comforted and persuaded by this proven false logic.
It is beyond the pale that our elected representatives would have essentially allowed this crisis to evolve to this level, but we cannot change what has occurred. However, we can change what we do in the next 2-3 days. Those Congressional Representatives inflexibly committed to their no tax principles are forsaking the long-term viability of the United States for the fleeting benefits of winning a political argument. This is ludicrous, embarrassing to witness, and literally dangerous, both economically and with respect to our reputation. You must set aside partisan differences, raise the debt ceiling, and craft a solution that includes an aggressive and sizable revenue (tax) component, in addition to spending cuts (see Scheme, stonewall and fulminate: America’s politicians posture as a self-inflicted crisis draws ever nearer in the current issue of The Economist). In fact, I even strongly encourage a new fiscal stimulus package. A recent story in July 25 issue of Fortune Magazine concluded that the financial bailout not only staved off an even worse financial crisis, but has made money for taxpayers ("Surprise! The big bad bailout is finally paying" off by Allan Sloan with Doris Burke). The structure and composition of that bailout had many problems which are well known. And while I know proposing another stimulus is political suicide for many, I suggest this is far better than the much larger dangers the US economy and its international reputation faces if such bold policy is not pursued. Do not go down the path of the UK's austerity measures, especially since their early results are clearly discouraging (George Osbourne Will Stick To Austerity Programme Despite Halting Output by Larry Elliott, UK GDP Figures Show Slower Growth of 0.2% in the BBCNews, and The Austerity Delusion, by Paul Krugman). If so, then the US is setting itself up for its own Greek tragedy (Greece Credit Rating Cut by Moody's Amid Default Warning in the BBCNews), with far more disastrous ramifications. Let's move away from politics and toward sound policy, immediately.
Regards,
John Davis
