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April 1, 2011

Giving Strategically, When the Government Can’t Help

By PAUL SULLIVAN

THIS is a season of fiscal austerity for governments, and state and local officials across the country are threatening to cut programs that aim to help the less fortunate. With tax revenue down and budgets constrained, they say they have little choice.

Now, a new book “Give Smart” (Public Affairs), written by two philanthropy experts, Thomas Tierney and Joel Fleishman, argues that the wealthier philanthropists around the world can focus on solving problems that government cannot undertake while also paying for research into new ideas that may be adopted later.

“Philanthropists can innovate, but the government must sustain,” said Mr. Tierney, chairman of the Bridgespan Group, which advises nonprofits. “This innovation can be accompanied by scaling up. It’s very different from providing shelter to the homeless or food to the hungry.”

He categorized what he and Mr. Fleishman, a professor of law and public policy sciences at Duke University, were advocating as “a shift from not just serving to solving.” Mr. Fleishman, described their approach as a how-to guide to strategic or venture philanthropy.

But their strategy is not without its detractors. “Philanthropy needs to be looked at as a continuum,” said Lorie Slutsky, president of the New York Community Trust, which manages about 2,000 charitable funds. “This is one important piece on the continuum. But you couldn’t do strategic philanthropy in a settlement house without individual donors who provide support or government contractors.”

How, then, should donors give in a time of increased need for social service programs? The answer is that it is easy to give money away but hard to do it in a way that will solve a problem.

HOW TO DO IT Some of the best examples of strategic giving come from people who set their sights on a narrow problem.

In 1953, John Dorr, who made his wealth through an engineering firm, theorized that many accidents were caused when drivers hugged the center line on highways when fog or snow reduced visibility. He began lobbying for a white line to be painted on the shoulder of highways. But highway departments balked at the cost, $150 a mile. So Mr. Dorr got permission to paint a white line along the edge of the Merritt Parkway in southern Connecticut. It was credited with reducing accidents, and a decade later the white line was adopted around the country.

With bigger problems, focusing on the component parts is the key. This is what Donald and Doris Fisher, who founded Gap, did in the 1990s when they started financing charter schools. Mr. Fisher had become concerned about the state of public schools in San Francisco, where he grew up. He figured that if he found a way to improve schools there, the model could be marketed around the country just as Gap’s khakis had been.

Today, their son John Fisher says that 75 percent of the family’s giving is tied to supporting not just the Knowledge Is Power Program, or KIPP, the charter school network his family has heavily financed, but to groups that work all around the charter school movement.

“Each of the organizations we backed really focus on a particular area, whether it’s advocacy or running great schools or finding the next group of leaders,” said Mr. Fisher, who advises KIPP. “If KIPP is focused on running great schools, where else can we benefit KIPP?”

While charter schools are well known now and have become popular with strategic philanthropists, they were not when the Fishers got involved.

And with governments cutting existing social service programs, most innovation is probably going to come from private donors.

“Government is a lot less flexible to testing out the new idea and documenting it,” Mr. Tierney said. “That’s why we talk about giving smart. It’s not enough for philanthropists to give away money. You need to build the initiative, particularly in a time of hardship.”

PITFALLS Doing that is not easy, and there are several major pitfalls with strategic philanthropy. The first is what the authors call “fuzzyheadness,” which they define as a big gap between what people want to achieve and what their money can accomplish. If there is any doubt, even the Gates Foundation, with $37 billion at its disposal, has had to pick and choose what to finance in its global health effort.

The second mistake some philanthropists make is not realizing that big, intractable problems have not been easily solved for a reason. Going it alone is probably not the best strategy. “Very little of substance is accomplished alone,” Mr. Tierney said. “This is tough with self-made people who are often quite independent.”

And then there is the risk of underinvesting in a problem. This happens when philanthropists try to keep the costs so low, they starve the organization of resources.

Ms. Slutsky said that problem pointed to the need for overlapping types of philanthropy. “If you have a painting and give it to a museum, that’s a great gift,” she said. “If you have someone who wants to pay to bring children to see it, that’s a great gift. But if you don’t have someone to pay the electricity bills, no one is going to see it.”

Avoiding these traps is not the only thing to contend with. Expectations also need to be managed. Joanna Jacobson, the former chief executive of Converse, helped found Strategic Grant Partners in 2002 with 15 wealthy Massachusetts families. The group, which focused on education and child welfare, has avoided the pitfalls on the “Give Smart” list. But in the process, she said she had lost some of her idealism.

“We all thought that government would cheer wildly, and say, ‘We’ll replace the things that don’t work with the things that do work,’ ” she said. But that did not happen. “I just believe that government should be transparent and require outcomes. Then some of the risk-taking work we do could be better utilized.”

This is where being realistic about what you want to accomplish is important. “The bigger the problem, the more reasons it hasn’t been solved,” Mr. Fleishman said. “You have to ask yourself, How will you go about doing it?”

OTHER OPTIONS Of course, philanthropists can give away their money as they want to. It is, after all, their money. And philanthropy is one area where learning on the job is fine.

Diane Feeney, a director at the French American Charitable Trust and daughter of Charles Feeney, the co-founder of Duty Free Shops, said she began giving away her family’s money in a completely nonstrategic fashion.

“We started out giving to our alma maters and the communities we were living in,” she said. “We had an endowment of $40 million, which was a lot for your local soup kitchen or your alma mater.”

Then, she and her siblings and mother began thinking of how they could have a big impact in one specific area: helping develop leaders in impoverished communities. Over 18 years, this interest grew.

“We started realizing that the management of these community-led groups was not very strong,” she said. “We started a technical assistance program, and we offered them consultants to help them work on whatever was most needed.”

The foundation will close next year, but even in shutting it down, Ms. Feeney said she was committed to acting in a way that helped those who received her grants to find aid elsewhere. And she is free to do exactly that.

“Philanthropy is a voluntary use of money,” said Melissa Berman, president of Rockefeller Philanthropy Advisors. “That’s why we stress understanding your personal goals and motivations.”

America's budget deficit

Mr Ryan makes his mark

Apr 5th 2011, 16:56 by G.I. | WASHINGTON

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Note: the Congressional Budget Office has now scored the Republican budget proposal. Our coverage of the analysis can be found here.

WHEN Paul Ryan, the Republican fiscal wunderkind, moved from opposition to power in last year’s midterm elections, the biggest question hanging over him was whether he would bring his radical fiscal views with him or quietly stash them in a dark corner as he settled down to the realities of governing.

Mr Ryan has answered the question today by unveiling a budget plan that, at least superficially, is almost as bold and painful as the Roadmap for America that he has flogged for years. It claims to slash the federal budget deficit from a little over 9% of GDP this year to just 1.6% by 2021. By contrast, the Congressional Budget Office reckons the deficit would fall to just 4.9% under Barack Obama’s budget. He does this without, on net, raising taxes. By closing loopholes, he would pay for a cut in the top personal and corporate rates. So how does he shrink the deficit? Through an eye-watering assault on entitlement spending, in particular health care. Mr Obama’s health care reform would be ditched, Medicaid would be converted to block grants, and traditional Medicare would be replaced with vouchers.

There are many problems with this strategy but it’s worth keeping in mind how remarkable it still is: a legislative proposal that takes dead aim at the real source of the long-term fiscal imbalance, namely, entitlements. Republicans now have an answer to editorials and Democrats demanding to know what their plan is for tackling that looming crisis. Of course, the proposal remains just that, a non-binding resolution that leaves the grimy details to other legislators who may wad them up and toss them in the rubbish bin. But for now, Mr Ryan may have turned what has long been an arcane part of the budget process, the annual budget resolution, into a focal point for long-term debate.

Mr Ryan’s "chairman's mark" for fiscal 2012 incorporates the steep cuts to discretionary spending (spending that must be authorised each year) that his party is now battling to embed in this year’s fiscal 2011 budget. It assumes the same spending on defence and security that Mr Obama did in his 2012 budget.

The bigger real cuts come in entitlements, also called mandatory outlays: this is spending that continues automatically from one year to the next. Instead of matching state Medicaid spending the federal government would provide block grants, as was done with welfare under Bill Clinton in the mid-1990s. This would strengthen states’ incentives to control costs, rather than having the federal government share in the cost of increased eligibility or coverage.

At present, Medicare beneficiaries typically pay premiums and deductibles in return for full coverage of a wide range of medical services. Mr Ryan proposes that starting in 2022, new enrollees receive a voucher from the federal government to buy a private plan. (He prefers the term “premium support” to vouchers, but they’re really the same thing.)

Neither block grants nor vouchers magically cures the root of rising health care costs, namely, medical inflation and rising case loads. What they do is shift the responsibility for bearing those costs to the states and to individuals. Mr Ryan rather disingenuously says his proposal would “strengthen” Medicaid. I guess you could call it that, if your idea of strengthening your son is to throw him out of the house at age 16 to fend for himself. States will no doubt welcome the freedom to shape Medicaid as they see fit; I doubt they will savour the need to raise taxes or slash services to cope with foregone federal funding.

Mr Ryan notes that with the government now paying roughly half of all health care costs, more disciplined federal funding could force efficiency into the system. However, that still leaves rising costs due to technological progress, an aging population, and the shrinking coverage offered by private sector employers. Mr Ryan’s cuts will have real consequences. The proportion of Americans with no insurance, which was set to decline significantly under Mr Obama’s plan, will rise instead. Medicare beneficiaries, who now enjoy benefits on a par with those enrolled in private plans, would instead have to accept a far less generous range of services, or pay out of pocket for more.

On taxes, Mr Ryan proposes chopping the top personal rate to 25%, from its current 35%, and from the 39.6% it is scheduled to reach if George Bush’s tax cuts expire as planned in 2013. He would also cut the top corporate rate to 25% from 35%, bringing America’s rate in line with international norms. Mr Ryan implies that his plan would be revenue neutral by eliminating loopholes and deductions.

Despite the impressive rhetoric, this is still a timid and politicised document by the standards of Mr Ryan’s original roadmap and the health care plan he proposed with Alice Rivlin, a budget director under Bill Clinton. Both contained far more detail about precisely how the entitlement changes would be implemented. Unlike the roadmap, his latest proposal completely ignores social security; apparently, you can only touch so many third rails at once. His tax reform plan is so bare bones that judging its credibility is almost impossible. Of the plan's $6.2 trillion in spending cuts over 10 years, more than a quarter come from "other mandatory" categories, without specifying which: food stamps? Pell grants? Veterans' benefits? If the Congressional Budget Office scores this plan, it may well find the numbers don’t add up.

Its projections of the economic impact are also surreal. To be sure, the plan is not as severe as Britain’s: the deficit is only 1.7 percentage points of GDP smaller in 2015 than under Mr Obama’s 2012 budget. Economic growth would be dented, but not grievously. Yet Mr Ryan, citing analysis by the Heritage Foundation, claims his plan would actually create 1m additional private sector jobs and slash the unemployment rate to 4% by 2015, compared to the Blue Chip private sector consensus of 6.6%. While the Heritage Foundation is probably not the first organisation most people turn to when seeking authoritative, impartial economic analysis, I’ll give them the benefit of the doubt. Yet when I read their report, I find the prediction of a massive investment boom utterly implausible. Corporations today enjoy record or near record profits. If government deficits were crowding out private investment (a key assumption of their analysis), short-term interest rates would not now be near zero and long-term rates near postwar lows. Mr Ryan risks undermining the credibility of his overall plan by casting its economic consequences in such an implausibly optimistic light.

The final question mark about Ryan’s plan is: what is it for? It’s a non-starter with Democrats and even fellow Republicans are going to think twice about embracing it. After all, they won last year’s midterm elections by scaring seniors into thinking Mr Obama would cut their Medicare benefits. Moreover, there is already an alternative long-term deficit reduction plan available: the one advanced by the Simpson-Bowles commission which has been embraced by a growing band of bipartisan senators. Mr Ryan was a member of the commission, but voted against its report, because it included tax increases and didn’t repeal Obamacare. Today, he offered his alternative, perhaps not as a final offer but in an attempt to drag the debate further to the right. Whether or not it succeeds, the debate is better off for having it.

April 10, 2011

The President Is Missing

By PAUL KRUGMAN

What have they done with President Obama? What happened to the inspirational figure his supporters thought they elected? Who is this bland, timid guy who doesn’t seem to stand for anything in particular?

I realize that with hostile Republicans controlling the House, there’s not much Mr. Obama can get done in the way of concrete policy. Arguably, all he has left is the bully pulpit. But he isn’t even using that — or, rather, he’s using it to reinforce his enemies’ narrative.

His remarks after last week’s budget deal were a case in point.

Maybe that terrible deal, in which Republicans ended up getting more than their opening bid, was the best he could achieve — although it looks from here as if the president’s idea of how to bargain is to start by negotiating with himself, making pre-emptive concessions, then pursue a second round of negotiation with the G.O.P., leading to further concessions.

And bear in mind that this was just the first of several chances for Republicans to hold the budget hostage and threaten a government shutdown; by caving in so completely on the first round, Mr. Obama set a baseline for even bigger concessions over the next few months.

But let’s give the president the benefit of the doubt, and suppose that $38 billion in spending cuts — and a much larger cut relative to his own budget proposals — was the best deal available. Even so, did Mr. Obama have to celebrate his defeat? Did he have to praise Congress for enacting “the largest annual spending cut in our history,” as if shortsighted budget cuts in the face of high unemployment — cuts that will slow growth and increase unemployment — are actually a good idea?

Among other things, the latest budget deal more than wipes out any positive economic effects of the big prize Mr. Obama supposedly won from last December’s deal, a temporary extension of his 2009 tax cuts for working Americans. And the price of that deal, let’s remember, was a two-year extension of the Bush tax cuts, at an immediate cost of $363 billion, and a potential cost that’s much larger — because it’s now looking increasingly likely that those irresponsible tax cuts will be made permanent.

More broadly, Mr. Obama is conspicuously failing to mount any kind of challenge to the philosophy now dominating Washington discussion — a philosophy that says the poor must accept big cuts in Medicaid and food stamps; the middle class must accept big cuts in Medicare (actually a dismantling of the whole program); and corporations and the rich must accept big cuts in the taxes they have to pay. Shared sacrifice!

I’m not exaggerating. The House budget proposal that was unveiled last week — and was praised as “bold” and “serious” by all of Washington’s Very Serious People — includes savage cuts in Medicaid and other programs that help the neediest, which would among other things deprive 34 million Americans of health insurance. It includes a plan to privatize and defund Medicare that would leave many if not most seniors unable to afford health care. And it includes a plan to sharply cut taxes on corporations and to bring the tax rate on high earners down to its lowest level since 1931.

The nonpartisan Tax Policy Center puts the revenue loss from these tax cuts at $2.9 trillion over the next decade. House Republicans claim that the tax cuts can be made “revenue neutral” by “broadening the tax base” — that is, by closing loopholes and ending exemptions. But you’d need to close a lot of loopholes to close a $3 trillion gap; for example, even completely eliminating one of the biggest exemptions, the mortgage interest deduction, wouldn’t come close. And G.O.P. leaders have not, of course, called for anything that drastic. I haven’t seen them name any significant exemptions they would end.

You might have expected the president’s team not just to reject this proposal, but to see it as a big fat political target. But while the G.O.P. proposal has drawn fire from a number of Democrats — including a harsh condemnation from Senator Max Baucus, a centrist who has often worked with Republicans — the White House response was a statement from the press secretary expressing mild disapproval.

What’s going on here? Despite the ferocious opposition he has faced since the day he took office, Mr. Obama is clearly still clinging to his vision of himself as a figure who can transcend America’s partisan differences. And his political strategists seem to believe that he can win re-election by positioning himself as being conciliatory and reasonable, by always being willing to compromise.

But if you ask me, I’d say that the nation wants — and more important, the nation needs — a president who believes in something, and is willing to take a stand. And that’s not what we’re seeing.

Living Beyond Your Means

Updated March 22, 2011, 12:18 PM

Michael I. Norton is an associate professor at the Harvard Business School. He is currently co-writing a book on money and happiness.

In a recent survey of Americans, my colleague Dan Ariely and I found that Americans drastically underestimated the level of wealth inequality in the United States. While recent data indicates that the richest 20 percent of Americans own 84 percent of all wealth, people estimated that this group owned just 59 percent – believing that total wealth in this country is far more evenly divided among poorer Americans.

Easy consumer credit and a belief in social mobility have reduced the clamor for wealth redistribution..What’s more, when we asked them how they thought wealth should be distributed, they told us they wanted an even more equitable distribution, with the richest 20 percent owning just 32 percent of the wealth. This was true of Democrats and Republicans, rich and poor – all groups we surveyed approved of some inequality, but their ideal was far more equal than the current level.

Why then, given the consensus on this more equal America, are Americans not clamoring for redistribution?

The actual United States wealth distribution plotted against the estimated and ideal distributions across all respondents. See more details. First, the expansion of consumer credit in the United States has allowed middle class and poor Americans to live beyond their means, masking their lack of wealth by increasing their debt. We might think that people who have "zero net worth” have nothing. But in fact, having zero net worth increasingly means owning a lot (cars, televisions, even houses) – but also owing a lot. As a result people with zero net worth, and even negative net worth, can still feel that they are living the American dream, doing “better” than their parents did while keeping up with the Joneses.

Second, poorer Americans’ belief in social mobility – despite strong evidence of its rarity – causes negative reactions to policies that would seem to benefit them, like raising taxes on those who earn and own a lot more. Why would the poor oppose taxes on the wealthy? Because many believe that they, or at least their children, will eventually be wealthy, voting for taxes on the rich may feel like voting for taxes on themselves. As a result, even the word “redistribution” has negative connotations.

My colleagues and I are now exploring whether educating Americans about the current level of wealth inequality (by showing them charts and pictures) might increase their support for policies that reduce this inequality. In addition, we are assessing whether different forms of redistribution – for example, raising the minimum wage, or longer term interventions like reducing disparities in education – are less likely to evoke heated opposition, and perhaps increase advocacy for greater wealth equality.

Grappling with the deficit

Rival visions

Barack Obama lays out his own plans for the future. They have little in common with those offered by the Republicans

Apr 14th 2011

AFTER months of inconclusive skirmishing, Washington’s budgetary battle-lines are being drawn in earnest. Neither the Republicans nor the Democrats won outright victories in December’s set-to over taxes or last week’s showdown over the budget for the remainder of this fiscal year. Moreover the stakes were tiny relative to the task at hand (see chart). But with Barack Obama giving his response on April 13th to the long-term budget plan unveiled a week earlier by the Republicans in the House of Representatives, both sides are now fully engaged. Their ideas about putting America’s finances to rights, although vague, are starkly opposed.

EnlargeMr Obama produced an only slightly less ambitious goal for deficit reduction than the House Republicans, albeit working from a more forgiving baseline: $4 trillion over 12 years compared to $4.4 trillion over 10 years. But the means by which he would achieve it are very different. Whereas the Republicans want to cut taxes, Mr Obama would raise them by more than $1 trillion. He wants to further strengthen his health reforms, which the Republicans want to scrap altogether. He proposes cuts in military spending—the one area where Republicans were reluctant to swing the axe. Much like Paul Ryan, the congressman who drew up the Republican plan, Mr Obama seems to have embraced the supposedly bipartisan goal of deficit reduction, but by means calculated to reassure his base and outrage his opponents.

Indeed Mr Obama spent much of the speech in which he described his plan spelling out his differences with the Republicans and denouncing the vision of America embodied in their proposal. Wealthier Americans, he reiterated several times, should pay more in taxes, not less; poorer ones should not bear the brunt of spending cuts. The Republican proposals, he claimed, would deprive 50m people of health insurance, leave bridges and roads to crumble unrepaired and allow such countries as Brazil, China and South Korea to surpass America in education and technological know-how, all for the sake of lowering taxes on the rich.

Instead, Mr Obama proposes to cut spending by $2 trillion and increase taxes by $1 trillion, all of which would save $1 trillion in extra interest payments, the White House calculates. Of the spending cuts, $400 billion would come from the armed forces, $480 billion from health care, $360 billion from other recurring items such as agricultural subsidies, and $770 billion from the “discretionary” part of the budget, meaning the spending that must be renewed each year. All the extra revenue would come from eliminating loopholes in the tax code. Mr Obama also said he would allow taxes on the rich to rise in 2012, as they are currently slated to do (but not on everyone else, as they are also slated to do). But since he was already assuming that that increase would go ahead, despite Republican vows to stop it, it is not included in his numbers.

Perhaps the starkest difference between the two plans concerns health care. Mr Ryan proposes to give older Americans vouchers to buy private insurance, instead of paying for the lion’s share of their medical bills directly. The value of the vouchers would rise more slowly than medical costs have done of late, however, leaving the elderly footing more of their bills. Mr Obama says that he refuses to leave seniors “at the mercy of the insurance industry, with a shrinking benefit to pay for rising costs”. Instead, he would try to tackle medical inflation head on, by giving more power to the cost-control board set up as part of the Democrats’ health-care reforms. But it is not at all clear that the board would in fact be able to find savings of the magnitude Mr Obama envisions without reducing the quality of care or passing more costs along to patients.

That is not the only instance in which Mr Obama has left the fine print to others. The defence cuts would be determined by a “fundamental review” conducted by the top brass. Big savings from Medicaid, the health-care scheme for the poor that Mr Ryan wants to entrust to the states, will somehow be achieved in consultation with governors, but without the federal government ceding control. Most glaringly, Mr Obama provides neither the details of the tax reforms he has in mind, nor a mechanism for drawing them up.

In theory, the president’s framework, as he called it, makes allowance for the fact that some of his woollier proposals may not yield the desired results by means of a “fail-safe” mechanism. It would institute across-the-board spending cuts from 2014 should the national debt continue to grow faster than the economy. Republicans are keen on such schemes in principle. But they have a poor record in practice, as they tend to be overridden by Congress. Worse, Mr Obama wants to count tax breaks as spending (which can be cut), and to exclude expensive social programmes from the automatic reductions—steps that transform the concept from a peace offering to a provocation in Republican eyes.

Sure enough, Republicans wasted no time in denouncing Mr Obama’s ideas as hollow, timid and partisan—an unconstructive declaration of class warfare. Before he had even revealed them, many insisted that they would not countenance any tax rises. Doctrinaire Democrats, for their part, complained that the president is too willing to cut social spending, and too reluctant to tax the rich to pay for them. It does not help that zealots on both sides are still smarting from the deal the president and the leaders of both parties in Congress struck on April 8th to cut spending in the current fiscal year.

However, Mr Obama himself acknowledges that his plan is only an opening bid, unlikely to become law in its present form. And the deal over this year’s budget suggests that the leadership of the two parties, at least, is not bent on confrontation. On the contrary, they found a shrewd formula to accommodate one another. The cuts, of $78.5 billion, were close to the $100 billion, the Republicans had demanded. But they were mostly confined to the areas the Democrats found least painful.

It may be precisely because Mr Obama anticipates fierce haggling with the Republicans over the next few months that he conceded so little ground in his speech. The Republicans, in turn, are threatening financial chaos by refusing to raise the cap Congress sets on the federal government’s borrowing, even as the debt nears the $14.3 trillion limit, unless Mr Obama concedes ground on the budget. A bipartisan group of senators, meanwhile, continues to work on a deficit-reduction scheme inspired by the fiscal commission set up by the president last year. Their proposal, likely to be unveiled in May, will probably fall somewhere between the president’s and the House Republicans’. A detente is still possible, despite all the martial rhetoric.

Obama's Speech on the Budget Deficit, April 2011

Published April 13, 2011

Speaker: Barack Obama

President Obama gave this speech at George Washington University on April 13, 2011.

THE PRESIDENT: Thank you very much. (Applause.) Please have a seat. Please have a seat, everyone.

It is wonderful to be back at GW. I want you to know that one of the reasons that I worked so hard with Democrats and Republicans to keep the government open was so that I could show up here today. I wanted to make sure that all of you had one more excuse to skip class. (Laughter.) You’re welcome. (Laughter.)

I want to give a special thanks to Steven Knapp, the president of GW. I just saw him -- where is he? There he is right there. (Applause.)

We've got a lot of distinguished guests here -- a couple of people I want to acknowledge. First of all, my outstanding Vice President, Joe Biden, is here. (Applause.) Our Secretary of the Treasury, Tim Geithner, is in the house. (Applause.) Jack Lew, the Director of the Office of Mangement and Budget. (Applause.) Gene Sperling, Chair of the National Economic Council, is here. (Applause.) Members of our bipartisan Fiscal Commission are here, including the two outstanding chairs -- Erskine Bowles and Alan Simpson -- are here. (Applause.)

And we have a number of members of Congress here today. I'm grateful for all of you taking the time to attend.

What we’ve been debating here in Washington over the last few weeks will affect the lives of the students here and families all across America in potentially profound ways. This debate over budgets and deficits is about more than just numbers on a page; it’s about more than just cutting and spending. It’s about the kind of future that we want. It’s about the kind of country that we believe in. And that’s what I want to spend some time talking about today.

From our first days as a nation, we have put our faith in free markets and free enterprise as the engine of America’s wealth and prosperity. More than citizens of any other country, we are rugged individualists, a self-reliant people with a healthy skepticism of too much government.

But there’s always been another thread running through our history -– a belief that we’re all connected, and that there are some things we can only do together, as a nation. We believe, in the words of our first Republican President, Abraham Lincoln, that through government, we should do together what we cannot do as well for ourselves.

And so we’ve built a strong military to keep us secure, and public schools and universities to educate our citizens. We’ve laid down railroads and highways to facilitate travel and commerce. We’ve supported the work of scientists and researchers whose discoveries have saved lives, unleashed repeated technological revolutions, and led to countless new jobs and entire new industries. Each of us has benefitted from these investments, and we’re a more prosperous country as a result.

Part of this American belief that we’re all connected also expresses itself in a conviction that each one of us deserves some basic measure of security and dignity. We recognize that no matter how responsibly we live our lives, hard times or bad luck, a crippling illness or a layoff may strike any one of us. “There but for the grace of God go I,” we say to ourselves. And so we contribute to programs like Medicare and Social Security, which guarantee us health care and a measure of basic income after a lifetime of hard work; unemployment insurance, which protects us against unexpected job loss; and Medicaid, which provides care for millions of seniors in nursing homes, poor children, those with disabilities. We’re a better country because of these commitments. I’ll go further. We would not be a great country without those commitments.

Now, for much of the last century, our nation found a way to afford these investments and priorities with the taxes paid by its citizens. As a country that values fairness, wealthier individuals have traditionally borne a greater share of this burden than the middle class or those less fortunate. Everybody pays, but the wealthier have borne a little more. This is not because we begrudge those who’ve done well -– we rightly celebrate their success. Instead, it’s a basic reflection of our belief that those who’ve benefited most from our way of life can afford to give back a little bit more. Moreover, this belief hasn’t hindered the success of those at the top of the income scale. They continue to do better and better with each passing year.

Now, at certain times -– particularly during war or recession -– our nation has had to borrow money to pay for some of our priorities. And as most families understand, a little credit card debt isn’t going to hurt if it’s temporary.

But as far back as the 1980s, America started amassing debt at more alarming levels, and our leaders began to realize that a larger challenge was on the horizon. They knew that eventually, the Baby Boom generation would retire, which meant a much bigger portion of our citizens would be relying on programs like Medicare, Social Security, and possibly Medicaid. Like parents with young children who know they have to start saving for the college years, America had to start borrowing less and saving more to prepare for the retirement of an entire generation.

To meet this challenge, our leaders came together three times during the 1990s to reduce our nation’s deficit -- three times. They forged historic agreements that required tough decisions made by the first President Bush, then made by President Clinton, by Democratic Congresses and by a Republican Congress. All three agreements asked for shared responsibility and shared sacrifice. But they largely protected the middle class; they largely protected our commitment to seniors; they protected our key investments in our future.

As a result of these bipartisan efforts, America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers.

But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program -– but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts -– tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.

But that’s not what happened. And so, by the time I took office, we once again found ourselves deeply in debt and unprepared for a Baby Boom retirement that is now starting to take place. When I took office, our projected deficit, annually, was more than $1 trillion. On top of that, we faced a terrible financial crisis and a recession that, like most recessions, led us to temporarily borrow even more.

In this case, we took a series of emergency steps that saved millions of jobs, kept credit flowing, and provided working families extra money in their pocket. It was absolutely the right thing to do, but these steps were expensive, and added to our deficits in the short term.

So that’s how our fiscal challenge was created. That’s how we got here. And now that our economic recovery is gaining strength, Democrats and Republicans must come together and restore the fiscal responsibility that served us so well in the 1990s. We have to live within our means. We have to reduce our deficit, and we have to get back on a path that will allow us to pay down our debt. And we have to do it in a way that protects the recovery, protects the investments we need to grow, create jobs, and helps us win the future.

Now, before I get into how we can achieve this goal, some of you, particularly the younger people here -- you don't qualify, Joe. (Laughter.) Some of you might be wondering, “Why is this so important? Why does this matter to me?”

Well, here’s why. Even after our economy recovers, our government will still be on track to spend more money than it takes in throughout this decade and beyond. That means we’ll have to keep borrowing more from countries like China. That means more of your tax dollars each year will go towards paying off the interest on all the loans that we keep taking out. By the end of this decade, the interest that we owe on our debt could rise to nearly $1 trillion. Think about that. That's the interest -- just the interest payments.

Then, as the Baby Boomers start to retire in greater numbers and health care costs continue to rise, the situation will get even worse. By 2025, the amount of taxes we currently pay will only be enough to finance our health care programs -- Medicare and Medicaid -- Social Security, and the interest we owe on our debt. That’s it. Every other national priority -– education, transportation, even our national security -– will have to be paid for with borrowed money.

Now, ultimately, all this rising debt will cost us jobs and damage our economy. It will prevent us from making the investments we need to win the future. We won’t be able to afford good schools, new research, or the repair of roads -– all the things that create new jobs and businesses here in America. Businesses will be less likely to invest and open shop in a country that seems unwilling or unable to balance its books. And if our creditors start worrying that we may be unable to pay back our debts, that could drive up interest rates for everybody who borrows money -– making it harder for businesses to expand and hire, or families to take out a mortgage.

Here’s the good news: That doesn’t have to be our future. That doesn’t have to be the country that we leave our children. We can solve this problem. We came together as Democrats and Republicans to meet this challenge before; we can do it again.

But that starts by being honest about what’s causing our deficit. You see, most Americans tend to dislike government spending in the abstract, but like the stuff that it buys. Most of us, regardless of party affiliation, believe that we should have a strong military and a strong defense. Most Americans believe we should invest in education and medical research. Most Americans think we should protect commitments like Social Security and Medicare. And without even looking at a poll, my finely honed political instincts tell me that almost nobody believes they should be paying higher taxes. (Laughter.)

So because all this spending is popular with both Republicans and Democrats alike, and because nobody wants to pay higher taxes, politicians are often eager to feed the impression that solving the problem is just a matter of eliminating waste and abuse. You’ll hear that phrase a lot. “We just need to eliminate waste and abuse.” The implication is that tackling the deficit issue won’t require tough choices. Or politicians suggest that we can somehow close our entire deficit by eliminating things like foreign aid, even though foreign aid makes up about 1 percent of our entire federal budget.

So here’s the truth. Around two-thirds of our budget -- two-thirds -- is spent on Medicare, Medicaid, Social Security, and national security. Two-thirds. Programs like unemployment

insurance, student loans, veterans’ benefits, and tax credits for working families take up another 20 percent. What’s left, after interest on the debt, is just 12 percent for everything else. That’s 12 percent for all of our national priorities -- education, clean energy, medical research, transportation, our national parks, food safety, keeping our air and water clean -- you name it -- all of that accounts for 12 percent of our budget.

Now, up till now, the debate here in Washington, the cuts proposed by a lot of folks in Washington, have focused exclusively on that 12 percent. But cuts to that 12 percent alone won’t solve the problem. So any serious plan to tackle our deficit will require us to put everything on the table, and take on excess spending wherever it exists in the budget.

A serious plan doesn’t require us to balance our budget overnight –- in fact, economists think that with the economy just starting to grow again, we need a phased-in approach –- but it does require tough decisions and support from our leaders in both parties now. Above all, it will require us to choose a vision of the America we want to see five years, 10 years, 20 years down the road.

Now, to their credit, one vision has been presented and championed by Republicans in the House of Representatives and embraced by several of their party’s presidential candidates. It’s a plan that aims to reduce our deficit by $4 trillion over the next 10 years, and one that addresses the challenge of Medicare and Medicaid in the years after that.

These are both worthy goals. They’re worthy goals for us to achieve. But the way this plan achieves those goals would lead to a fundamentally different America than the one we’ve known certainly in my lifetime. In fact, I think it would be fundamentally different than what we’ve known throughout our history.

A 70 percent cut in clean energy. A 25 percent cut in education. A 30 percent cut in transportation. Cuts in college Pell Grants that will grow to more than $1,000 per year. That’s the proposal. These aren’t the kind of cuts you make when you’re trying to get rid of some waste or find extra savings in the budget. These aren’t the kinds of cuts that the Fiscal Commission proposed. These are the kinds of cuts that tell us we can’t afford the America that I believe in and I think you believe in.

I believe it paints a vision of our future that is deeply pessimistic. It’s a vision that says if our roads crumble and our bridges collapse, we can’t afford to fix them. If there are bright young Americans who have the drive and the will but not the money to go to college, we can’t afford to send them.

Go to China and you’ll see businesses opening research labs and solar facilities. South Korean children are outpacing our kids in math and science. They’re scrambling to figure out how they put more money into education. Brazil is investing billions in new infrastructure and can run half their cars not on high-priced gasoline, but on biofuels. And yet, we are presented with a vision that says the American people, the United States of America -– the greatest nation on Earth -– can’t afford any of this.

It’s a vision that says America can’t afford to keep the promise we’ve made to care for our seniors. It says that 10 years from now, if you’re a 65-year-old who’s eligible for Medicare, you should have to pay nearly $6,400 more than you would today. It says instead of guaranteed health care, you will get a voucher. And if that voucher isn’t worth enough to buy the insurance that’s available in the open marketplace, well, tough luck -– you’re on your own. Put simply, it ends Medicare as we know it.

It’s a vision that says up to 50 million Americans have to lose their health insurance in order for us to reduce the deficit. Who are these 50 million Americans? Many are somebody’s grandparents -- may be one of yours -- who wouldn’t be able to afford nursing home care without Medicaid. Many are poor children. Some are middle-class families who have children with autism or Down’s syndrome. Some of these kids with disabilities are -- the disabilities are so severe that they require 24-hour care. These are the Americans we’d be telling to fend for themselves.

And worst of all, this is a vision that says even though Americans can’t afford to invest in education at current levels, or clean energy, even though we can’t afford to maintain our commitment on Medicare and Medicaid, we can somehow afford more than $1 trillion in new tax breaks for the wealthy. Think about that.

In the last decade, the average income of the bottom 90 percent of all working Americans actually declined. Meanwhile, the top 1 percent saw their income rise by an average of more than a quarter of a million dollars each. That’s who needs to pay less taxes?

They want to give people like me a $200,000 tax cut that’s paid for by asking 33 seniors each to pay $6,000 more in health costs. That’s not right. And it’s not going to happen as long as I’m President. (Applause.)

This vision is less about reducing the deficit than it is about changing the basic social compact in America. Ronald Reagan’s own budget director said, there’s nothing “serious” or “courageous” about this plan. There’s nothing serious about a plan that claims to reduce the deficit by spending a trillion dollars on tax cuts for millionaires and billionaires. And I don't think there’s anything courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill. That's not a vision of the America I know.

The America I know is generous and compassionate. It’s a land of opportunity and optimism. Yes, we take responsibility for ourselves, but we also take responsibility for each other; for the country we want and the future that we share. We’re a nation that built a railroad across a continent and brought light to communities shrouded in darkness. We sent a generation to college on the GI Bill and we saved millions of seniors from poverty with Social Security and Medicare. We have led the world in scientific research and technological breakthroughs that have transformed millions of lives. That’s who we are. This is the America that I know. We don’t have to choose between a future of spiraling debt and one where we forfeit our investment in our people and our country.

To meet our fiscal challenge, we will need to make reforms. We will all need to make sacrifices. But we do not have to sacrifice the America we believe in. And as long as I’m President, we won’t.

So today, I’m proposing a more balanced approach to achieve $4 trillion in deficit reduction over 12 years. It’s an approach that borrows from the recommendations of the bipartisan Fiscal Commission that I appointed last year, and it builds on the roughly $1 trillion in deficit reduction I already proposed in my 2012 budget. It’s an approach that puts every kind of spending on the table -- but one that protects the middle class, our promise to seniors, and our investments in the future.

The first step in our approach is to keep annual domestic spending low by building on the savings that both parties agreed to last week. That step alone will save us about $750 billion over 12 years. We will make the tough cuts necessary to achieve these savings, including in programs that I care deeply about, but I will not sacrifice the core investments that we need to grow and create jobs. We will invest in medical research. We will invest in clean energy technology. We will invest in new roads and airports and broadband access. We will invest in education. We will invest in job training. We will do what we need to do to compete, and we will win the future.

The second step in our approach is to find additional savings in our defense budget. Now, as Commander-in-Chief, I have no greater responsibility than protecting our national security, and I will never accept cuts that compromise our ability to defend our homeland or America’s interests around the world. But as the Chairman of the Joint Chiefs, Admiral Mullen, has said, the greatest long-term threat to America’s national security is America’s debt. So just as we must find more savings in domestic programs, we must do the same in defense. And we can do that while still keeping ourselves safe.

Over the last two years, Secretary Bob Gates has courageously taken on wasteful spending, saving $400 billion in current and future spending. I believe we can do that again. We need to not only eliminate waste and improve efficiency and effectiveness, but we’re going to have to conduct a fundamental review of America’s missions, capabilities, and our role in a changing world. I intend to work with Secretary Gates and the Joint Chiefs on this review, and I will make specific decisions about spending after it’s complete.

The third step in our approach is to further reduce health care spending in our budget. Now, here, the difference with the House Republican plan could not be clearer. Their plan essentially lowers the government’s health care bills by asking seniors and poor families to pay them instead. Our approach lowers the government’s health care bills by reducing the cost of health care itself.

Already, the reforms we passed in the health care law will reduce our deficit by $1 trillion. My approach would build on these reforms. We will reduce wasteful subsidies and erroneous payments. We will cut spending on prescription drugs by using Medicare’s purchasing power to drive greater efficiency and speed generic brands of medicine onto the market. We will work with governors of both parties to demand more efficiency and accountability from Medicaid.

We will change the way we pay for health care -– not by the procedure or the number of days spent in a hospital, but with new incentives for doctors and hospitals to prevent injuries and improve results. And we will slow the growth of Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers who will look at all the evidence and recommend the best ways to reduce unnecessary spending while protecting access to the services that seniors need.

Now, we believe the reforms we’ve proposed to strengthen Medicare and Medicaid will enable us to keep these commitments to our citizens while saving us $500 billion by 2023, and an additional $1 trillion in the decade after that. But if we’re wrong, and Medicare costs rise faster than we expect, then this approach will give the independent commission the authority to make additional savings by further improving Medicare.

But let me be absolutely clear: I will preserve these health care programs as a promise we make to each other in this society. I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry, with a shrinking benefit to pay for rising costs. I will not tell families with children who have disabilities that they have to fend for themselves. We will reform these programs, but we will not abandon the fundamental commitment this country has kept for generations.

That includes, by the way, our commitment to Social Security. While Social Security is not the cause of our deficit, it faces real long-term challenges in a country that’s growing older. As I said in the State of the Union, both parties should work together now to strengthen Social Security for future generations. But we have to do it without putting at risk current retirees, or the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market. And it can be done.

The fourth step in our approach is to reduce spending in the tax code, so-called tax expenditures. In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. We can’t afford it. And I refuse to renew them again.

Beyond that, the tax code is also loaded up with spending on things like itemized deductions. And while I agree with the goals of many of these deductions, from homeownership to charitable giving, we can’t ignore the fact that they provide millionaires an average tax break of $75,000 but do nothing for the typical middle-class family that doesn’t itemize. So my budget calls for limiting itemized deductions for the wealthiest 2 percent of Americans -- a reform that would reduce the deficit by $320 billion over 10 years.

But to reduce the deficit, I believe we should go further. And that’s why I’m calling on Congress to reform our individual tax code so that it is fair and simple -- so that the amount of taxes you pay isn’t determined by what kind of accountant you can afford.

I believe reform should protect the middle class, promote economic growth, and build on the fiscal commission’s model of reducing tax expenditures so that there’s enough savings to both lower rates and lower the deficit. And as I called for in the State of the Union, we should reform our corporate tax code as well, to make our businesses and our economy more competitive.

So this is my approach to reduce the deficit by $4 trillion over the next 12 years. It’s an approach that achieves about $2 trillion in spending cuts across the budget. It will lower our interest payments on the debt by $1 trillion. It calls for tax reform to cut about $1 trillion in tax expenditures -- spending in the tax code. And it achieves these goals while protecting the middle class, protecting our commitment to seniors, and protecting our investments in the future.

Now, in the coming years, if the recovery speeds up and our economy grows faster than our current projections, we can make even greater progress than I’ve pledged here. But just to hold Washington -- and to hold me --- accountable and make sure that the debt burden continues to decline, my plan includes a debt failsafe. If, by 2014, our debt is not projected to fall as a share of the economy -– if we haven’t hit our targets, if Congress has failed to act -– then my plan will require us to come together and make up the additional savings with more spending cuts and more spending reductions in the tax code. That should be an incentive for us to act boldly now, instead of kicking our problems further down the road.

So this is our vision for America -– this is my vision for America -- a vision where we live within our means while still investing in our future; where everyone makes sacrifices but no one bears all the burden; where we provide a basic measure of security for our citizens and we provide rising opportunity for our children.

There will be those who vigorously disagree with my approach. I can guarantee that as well. (Laughter.) Some will argue we should not even consider ever -- ever -- raising taxes, even if only on the wealthiest Americans. It’s just an article of faith to them. I say that at a time when the tax burden on the wealthy is at its lowest level in half a century, the most fortunate among us can afford to pay a little more. I don’t need another tax cut. Warren Buffett doesn’t need another tax cut. Not if we have to pay for it by making seniors pay more for Medicare. Or by cutting kids from Head Start. Or by taking away college scholarships that I wouldn’t be here without and that some of you would not be here without.

And here’s the thing: I believe that most wealthy Americans would agree with me. They want to give back to their country, a country that’s done so much for them. It’s just Washington hasn’t asked them to.

Others will say that we shouldn’t even talk about cutting spending until the economy is fully recovered. These are mostly folks in my party. I’m sympathetic to this view -- which is one of the reasons I supported the payroll tax cuts we passed in December. It’s also why we have to use a scalpel and not a machete to reduce the deficit, so that we can keep making the investments that create jobs. But doing nothing on the deficit is just not an option. Our debt has grown so large that we could do real damage to the economy if we don’t begin a process now to get our fiscal house in order.

Finally, there are those who believe we shouldn’t make any reforms to Medicare, Medicaid, or Social Security, out of fear that any talk of change to these programs will immediately usher in the sort of steps that the House Republicans have proposed. And I understand those fears. But I guarantee that if we don’t make any changes at all, we won’t be able to keep our commitment to a retiring generation that will live longer and will face higher health care costs than those who came before.

Indeed, to those in my own party, I say that if we truly believe in a progressive vision of our society, we have an obligation to prove that we can afford our commitments. If we believe the government can make a difference in people’s lives, we have the obligation to prove that it works -– by making government smarter, and leaner and more effective.

Of course, there are those who simply say there’s no way we can come together at all and agree on a solution to this challenge. They’ll say the politics of this city are just too broken; the choices are just too hard; the parties are just too far apart. And after a few years on this job, I have some sympathy for this view. (Laughter.)

But I also know that we’ve come together before and met big challenges. Ronald Reagan and Tip O’Neill came together to save Social Security for future generations. The first President Bush and a Democratic Congress came together to reduce the deficit. President Clinton and a Republican Congress battled each other ferociously, disagreed on just about everything, but they still found a way to balance the budget. And in the last few months, both parties have come together to pass historic tax relief and spending cuts.

And I know there are Republicans and Democrats in Congress who want to see a balanced approach to deficit reduction. And even those Republicans I disagree with most strongly I believe are sincere about wanting to do right by their country. We may disagree on our visions, but I truly believe they want to do the right thing.

So I believe we can, and must, come together again. This morning, I met with Democratic and Republican leaders in Congress to discuss the approach that I laid out today. And in early May, the Vice President will begin regular meetings with leaders in both parties with the aim of reaching a final agreement on a plan to reduce the deficit and get it done by the end of June.

I don’t expect the details in any final agreement to look exactly like the approach I laid out today. This a democracy; that’s not how things work. I’m eager to hear other ideas from all ends of the political spectrum. And though I’m sure the criticism of what I’ve said here today will be fierce in some quarters, and my critique of the House Republican approach has been strong, Americans deserve and will demand that we all make an effort to bridge our differences and find common ground.

This larger debate that we’re having -- this larger debate about the size and the role of government -- it has been with us since our founding days. And during moments of great challenge and change, like the one that we’re living through now, the debate gets sharper and it gets more vigorous. That’s not a bad thing. In fact, it’s a good thing. As a country that prizes both our individual freedom and our obligations to one another, this is one of the most important debates that we can have.

But no matter what we argue, no matter where we stand, we’ve always held certain beliefs as Americans. We believe that in order to preserve our own freedoms and pursue our own happiness, we can’t just think about ourselves. We have to think about the country that made these liberties possible. We have to think about our fellow citizens with whom we share a community. And we have to think about what’s required to preserve the American Dream for future generations.

This sense of responsibility -- to each other and to our country -- this isn’t a partisan feeling. It isn’t a Democratic or a Republican idea. It’s patriotism.

The other day I received a letter from a man in Florida. He started off by telling me he didn’t vote for me and he hasn’t always agreed with me. But even though he’s worried about our economy and the state of our politics -- here’s what he said -- he said, “I still believe. I believe in that great country that my grandfather told me about. I believe that somewhere lost in this quagmire of petty bickering on every news station, the ‘American Dream’ is still alive…We need to use our dollars here rebuilding, refurbishing and restoring all that our ancestors struggled to create and maintain… We as a people must do this together, no matter the color of the state one comes from or the side of the aisle one might sit on.”

“I still believe.” I still believe as well. And I know that if we can come together and uphold our responsibilities to one another and to this larger enterprise that is America, we will keep the dream of our founding alive -- in our time; and we will pass it on to our children. We will pass on to our children a country that we believe in.

Thank you. God bless you, and may God bless the United States of America

Grappling with the deficit

Rival visions

Barack Obama lays out his own plans for the future. They have little in common with those offered by the Republicans

Apr 14th 2011

AFTER months of inconclusive skirmishing, Washington’s budgetary battle-lines are being drawn in earnest. Neither the Republicans nor the Democrats won outright victories in December’s set-to over taxes or last week’s showdown over the budget for the remainder of this fiscal year. Moreover the stakes were tiny relative to the task at hand (see chart). But with Barack Obama giving his response on April 13th to the long-term budget plan unveiled a week earlier by the Republicans in the House of Representatives, both sides are now fully engaged. Their ideas about putting America’s finances to rights, although vague, are starkly opposed.

Mr Obama produced an only slightly less ambitious goal for deficit reduction than the House Republicans, albeit working from a more forgiving baseline: $4 trillion over 12 years compared to $4.4 trillion over 10 years. But the means by which he would achieve it are very different. Whereas the Republicans want to cut taxes, Mr Obama would raise them by more than $1 trillion. He wants to further strengthen his health reforms, which the Republicans want to scrap altogether. He proposes cuts in military spending—the one area where Republicans were reluctant to swing the axe. Much like Paul Ryan, the congressman who drew up the Republican plan, Mr Obama seems to have embraced the supposedly bipartisan goal of deficit reduction, but by means calculated to reassure his base and outrage his opponents.

Indeed Mr Obama spent much of the speech in which he described his plan spelling out his differences with the Republicans and denouncing the vision of America embodied in their proposal. Wealthier Americans, he reiterated several times, should pay more in taxes, not less; poorer ones should not bear the brunt of spending cuts. The Republican proposals, he claimed, would deprive 50m people of health insurance, leave bridges and roads to crumble unrepaired and allow such countries as Brazil, China and South Korea to surpass America in education and technological know-how, all for the sake of lowering taxes on the rich.

Instead, Mr Obama proposes to cut spending by $2 trillion and increase taxes by $1 trillion, all of which would save $1 trillion in extra interest payments, the White House calculates. Of the spending cuts, $400 billion would come from the armed forces, $480 billion from health care, $360 billion from other recurring items such as agricultural subsidies, and $770 billion from the “discretionary” part of the budget, meaning the spending that must be renewed each year. All the extra revenue would come from eliminating loopholes in the tax code. Mr Obama also said he would allow taxes on the rich to rise in 2012, as they are currently slated to do (but not on everyone else, as they are also slated to do). But since he was already assuming that that increase would go ahead, despite Republican vows to stop it, it is not included in his numbers.

Perhaps the starkest difference between the two plans concerns health care. Mr Ryan proposes to give older Americans vouchers to buy private insurance, instead of paying for the lion’s share of their medical bills directly. The value of the vouchers would rise more slowly than medical costs have done of late, however, leaving the elderly footing more of their bills. Mr Obama says that he refuses to leave seniors “at the mercy of the insurance industry, with a shrinking benefit to pay for rising costs”. Instead, he would try to tackle medical inflation head on, by giving more power to the cost-control board set up as part of the Democrats’ health-care reforms. But it is not at all clear that the board would in fact be able to find savings of the magnitude Mr Obama envisions without reducing the quality of care or passing more costs along to patients.

That is not the only instance in which Mr Obama has left the fine print to others. The defence cuts would be determined by a “fundamental review” conducted by the top brass. Big savings from Medicaid, the health-care scheme for the poor that Mr Ryan wants to entrust to the states, will somehow be achieved in consultation with governors, but without the federal government ceding control. Most glaringly, Mr Obama provides neither the details of the tax reforms he has in mind, nor a mechanism for drawing them up.

In theory, the president’s framework, as he called it, makes allowance for the fact that some of his woollier proposals may not yield the desired results by means of a “fail-safe” mechanism. It would institute across-the-board spending cuts from 2014 should the national debt continue to grow faster than the economy. Republicans are keen on such schemes in principle. But they have a poor record in practice, as they tend to be overridden by Congress. Worse, Mr Obama wants to count tax breaks as spending (which can be cut), and to exclude expensive social programmes from the automatic reductions—steps that transform the concept from a peace offering to a provocation in Republican eyes.

Sure enough, Republicans wasted no time in denouncing Mr Obama’s ideas as hollow, timid and partisan—an unconstructive declaration of class warfare. Before he had even revealed them, many insisted that they would not countenance any tax rises. Doctrinaire Democrats, for their part, complained that the president is too willing to cut social spending, and too reluctant to tax the rich to pay for them. It does not help that zealots on both sides are still smarting from the deal the president and the leaders of both parties in Congress struck on April 8th to cut spending in the current fiscal year.

However, Mr Obama himself acknowledges that his plan is only an opening bid, unlikely to become law in its present form. And the deal over this year’s budget suggests that the leadership of the two parties, at least, is not bent on confrontation. On the contrary, they found a shrewd formula to accommodate one another. The cuts, of $78.5 billion, were close to the $100 billion, the Republicans had demanded. But they were mostly confined to the areas the Democrats found least painful.

It may be precisely because Mr Obama anticipates fierce haggling with the Republicans over the next few months that he conceded so little ground in his speech. The Republicans, in turn, are threatening financial chaos by refusing to raise the cap Congress sets on the federal government’s borrowing, even as the debt nears the $14.3 trillion limit, unless Mr Obama concedes ground on the budget. A bipartisan group of senators, meanwhile, continues to work on a deficit-reduction scheme inspired by the fiscal commission set up by the president last year. Their proposal, likely to be unveiled in May, will probably fall somewhere between the president’s and the House Republicans’. A detente is still possible, despite all the martial rhetoric.

Saturday April 16, 2011

Stronger Rules Will Rein In the Debt

Pete Domenici, Former Chairman, Senate Budget Committee

POLITICO

March 28, 2011 —

President Barack Obama’s fight with Congress over government funding for the rest of this fiscal year is a distraction from much more important budget challenges: forging a multiyear, bipartisan agreement that can rein in future debt increases and strengthening the budget process to keep it on a fiscally responsible path.

We have participated in most of the major fiscal policy agreements of the past 30 years, including some excruciating negotiations between presidents and Congresses. We both took part in the Gramm-Rudman-Hollings negotiations, which Congress passed in 1985. We also were involved in the 1990, 1993 and 1997 budget agreements, which yielded the first budget surpluses in decades. Needless to say, we are particularly proud that we helped produce those surpluses. But current debt and deficits are much scarier than those of the 1980s and 1990s, and current projections of future debt are the most alarming we’ve seen. Even when the economy recovers from this deep recession and war spending winds down, debt is expected to keep rising to dangerous levels. We have not faced such a frightening fiscal future since the Great Depression. It demands extraordinary political commitment to fiscal responsibility and stronger budget rules than we’ve ever had. We have learned at least four lessons from our long budget experience. First, successful budget action must be bipartisan and must involve the president. Consider, for example, the 1990 agreement between President George H.W. Bush and a Democrat-led Congress, which resulted from marathon negotiating sessions at Andrews Air Force Base. Or the 1997 agreement between President Bill Clinton and a Republican-led Congress. The 1993 deficit reduction package — which involved only Democrats and contributed to the late 1990s surpluses — is less an exception than an illustration of why we need bipartisan action. Many Democrats who voted for those tax increases lost their seats, as Republicans regained control of the House in 1994. Now that controlling future debt requires slowing the growth of popular entitlements as well as raising revenue, the two parties must work together, so neither can blame the other for unpopular actions. Second, budget process rules must be enforced. The Gramm-Rudman-Hollings act was rooted in an admirable concept — spending would be automatically cut (“sequestered”) if Congress didn’t reach prescribed deficit targets. That, presumably, would force Congress to act and so avoid the meat-ax approach of a sequester. But Gramm-Rudman-Hollings failed. Congress just ignored it, partly because the sequester was such a drastic threat. Third, enforceable rules can help achieve fiscal responsibility. The discretionary spending caps of the Budget Enforcement Act of 1990 restrained appropriations growth until the surpluses appeared. Similarly, the BEA’s pay-as-you-go rules kept the administration or Congress from proposing entitlement increases or tax cuts that were not paid for. The most effective tool for consistently producing fiscally responsible results is the “reconciliation” process of the Congressional Budget Act. Under it, Congress orders its own committees to revise laws within their respective jurisdictions to reach certain deficit reduction goals. If the committees balk, then the budget committees are empowered to change the laws themselves. Needless to say, congressional committees’ potential loss of power over policies within their jurisdictions generally prompts them to follow instructions. Fourth, new rules are necessary. Given the current outlook, restraining the rapid growth of debt requires slowing the growth of total spending on health entitlements. Pay-go rules are necessary but not sufficient — they only prevent new legislation from making future deficits worse. New approaches are needed. Changing Medicare to a premium support program would mean that increasing subsidies could be limited by legislation. Congress should pass long-term spending and revenue targets consistent with stabilizing the debt and review them periodically to ensure that the budget is on track. It should also empower an “accountability commission,” to propose measures for returning the budget to a fiscally responsible track if deviations occur. It is urgent that the president and Congress reach a bipartisan agreement on spending and revenue policies that can reverse and stabilize our growing debt. Our experience demonstrates that a serious commitment to fiscal restraint and process reform, combined with political will, can produce bipartisan legislation that will serve the country well.

The Weak Dollar Problem

by Steve H. Hanke

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C.

Added to cato.org on April 15, 2011

This article appeared in the May 2011 issue of Globe Asia.

The Chairman of the Federal Reserve Ben S. Bernanke has embraced a weak dollar policy. And he is not alone. The weak dollar mantra is very much in evidence on most of the boulevards and in the back alleys of Washington, D.C. The idea even has a certain appeal to the common man on the street. After all, a cheap dollar is advertised as an export stimulant and the fuel for an economic boom. But, the common man is often wrong, and so is Chairman Bernanke.

About the only thing that has boomed during the last two years are prices, particularly commodity prices. The accompanying chart traces the producer price index for both crude materials (primarily food and energy) and for finished goods. Measured by both of these sensitive metrics, prices are booming, with the PPI for crude materials up by 14% since the Fed announced its second quantitative easing program in November 2010.

But, those prices are not the ones that Chairman Bernanke and his inflation-targeting colleagues at the Fed are looking at. Rather, they focus on the consumer price index, absent food and energy. By doing so, they exclude those items that are experiencing price surges. Never mind. The Chairman and his colleagues continue to play down the inflation threat. But, the public isn't buying their story. Most people are going to the gasoline station and grocery store several times a week and know what's happening to gasoline and food prices. Not surprisingly, the credibility of the Fed has all but disappeared, with even the taxman commanding more favorable ratings.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C.

More by Steve H. Hanke

If the Fed is in denial about the inflation threat, it's blind to the possibility that the weak dollar is causing energy and food prices to surge. Oil and most other food and industrial commodities are invoiced in dollars. Accordingly, when the dollar goes "down" the price of primary commodities tend to automatically go "up," and vice versa.

The accompanying chart, which traces the course of the U.S. dollar-euro exchange rate and the price of crude oil since January 2011, tells the story. During that period, the dollar has lost value against the euro and the price of oil has increased. For each 1% decline in the dollar against the euro, there was on average a 0.5% increase in the price of oil. The biggest single contributor to oil price increases in recent months is not located in Libya, but at the headquarters of the Federal Reserve in Washington, D.C.

This is not the end of the dollar story, however. The U.S., working through various international forums, such as the Group of Twenty (G-20), advocates "enhancing exchange rate flexibility to better reflect underlying economic fundamentals and structural reforms." This language is broadly understood as code for advocating floating exchangerate regimes, particularly in the case of China. Accordingly, it implies an anti-currency bloc stance.

Since many countries link — either tightly or loosely — their currencies to the U.S. dollar, "exchange-rate flexibility" is, at best, problematic. At its worst, the U.S. (G-20) position threatens the entire foundation of countries — like the oil producers in the Persian Gulf — that are, out of necessity, firmly in the dollar bloc. The currency bloc countries should embrace and advocate "flexibility," too. But they should, unlike the G-20, define exactly what, in the context of exchange-rate regimes, the term "flexibility" means.

Strictly fixed and floating exchange rates are regimes in which the monetary authority is aiming for only one target at a time. Although floating and fixed rates appear dissimilar, they are members of the same free-market family. Both operate without exchange controls or sterilization, and both are free-market mechanisms for balance-of-payments adjustments and the supply of convertible currencies (see the accompanying table). With a floating rate, a central bank sets a monetary policy but has no exchange rate policy — the exchange rate is on autopilot. In consequence, the monetary base is determined domestically by a central bank. With a fixed rate, or what is often referred to as a unified currency, there are two possibilities: either a currency board sets the exchange rate, but has no monetary policy — the money supply is on autopilot — or a country is "dollarized" and uses foreign currency as its own. Accordingly, under a fixed-rate regime, a country's monetary base is determined by the balance of payments, moving in a one-to-one correspondence with changes in its foreign reserves.

With both of these free-market exchange rate mechanisms, there cannot be conflicts between monetary and exchange rate policies, and balanceof- payments crises cannot rear their ugly heads. Floating- and fixed-rate regimes are inherently equilibrium systems in which market forces act to automatically rebalance financial flows and avert balance-of-payments crises. Both floating and fixed exchange-rate regimes provide flexibility — namely, automaticity, currency convertibility, no exchange controls and no sterilization.

Accordingly, the so-called global imbalance problems are not problems. Either a floating- or a fixed-rate regime will automatically act to steer global savings to its most wanted destination. As a result, excess savings relative to investment opportunity in some parts of the world flow into other parts where savings are in scare supply relative to investment opportunity. The invisible hand of market forces distributes savings efficiently across the globe.

Most economists use "fixed" and "pegged" as interchangeable, or nearly interchangeable, terms for exchange rates. But, while superficially similar, they are basically very different exchange-rate arrangements. Pegged-rate systems are those where the monetary authority is aiming for more than one target at a time. They often employ exchange controls and sterilization, and are not free-market mechanisms for international balance-of-payments adjustments. The currencies produced in some pegged exchange regimes — such as China's — are not even convertible. Pegged exchange rates are inherently disequilibrium systems, lacking an automatic mechanism to produce balance-ofpayments adjustments. Pegged rates require a central bank to manage both the exchange rate and monetary policy. With a pegged rate, the monetary base contains both domestic and foreign components.

Unlike floating and fixed rates, pegged rates invariably result in conflicts between monetary and exchange rate policies. For example, when capital inflows become "excessive" under a pegged system, a central bank often attempts to sterilize the ensuing increase in the foreign component of the monetary base by selling bonds, reducing the domestic component of the base. And when outflows become "excessive," a central bank attempts to offset the decrease in the foreign component of the base by buying bonds, increasing the domestic component of the monetary base. Balance-of- payments crises erupt as a central bank begins to offset more and more of the reduction in the foreign component of the monetary base with domestically created base money. When this occurs, it is only a matter of time before currency speculators spot the contradictions between exchange rate and monetary policies and force a deval‎uation, the imposition of exchange controls, or both.

In today's environment, "excessive" outflows and the threat of deval‎uations do not represent the problem facing most countries with pegged rates. Rather, "excessive" capital inflows represent today's problem. These inflows often result in currency appreciation pressures, very large sterilization activities, the accumulation of foreign-exchange reserves and even the imposition of exchange controls and new regulatory mandates in the domestic banking system.

To protect themselves, the currency bloc countries should explain what exchange-rate flexibility means to the them: full currency convertibility, no exchange controls and no sterilization. In that context, either a floating- or a fixed-rate regime qualify as free-market mechanisms that work to automatically avoid balanceof- payments crises and so-called global imbalance problems.

For the countries — like the oil producers in the Persian Gulf — the U.S. dollar bloc and fixed exchange rates are a necessity. These countries are mono-product economies, and their "product," oil, is invoiced in dollars. Accordingly, if a floating exchange-rate regime were adopted, their nominal exchange rates would fluctuate erratically as oil prices fluctuate. When the price of oil rises (falls), the local currencies would appreciate (depreciate). Without a currency link to the dollar and a nominal anchor for its price level, the oil producing countries would experience a wild roller-coaster ride — one distinguished by deflationary lows and inflationary highs.

Thanks to the Fed's weak dollar policy, the U.S. faces an inflation problem and so does the rest of the world. The weak dollar and the lack of "flexibility" — properly understood — also threaten the free flow of capital and the stability of the international monetary system. It's time for the Fed to start focusing on the value and stability of the U.S. dollar.

April 16, 2011

The Budget Debate, RevealedBy RICHARD W. STEVENSON

WASHINGTON — The air in the capital these days is thick with references to trillion-dollar deficits, debt-to-G.D.P. ratios and mandatory spending. But the budget debate that became fully engaged last week is about far more than accounting and arcane policy disputes. What is under way now is the most fundamental reassessment of the size and role of government — of the balance between personal responsibility and private markets on the one hand and public responsibility and social welfare on the other — at least since Ronald Reagan and perhaps since F.D.R.

The battle ahead “is the big one, and goes to the very major questions about the role of government,” said G. William Hoagland, a former Republican staff director of the Senate Budget Committee. “This is going to be a very fundamental clash of ideologies.”

The Democratic and Republican Parties have their own internal tensions to address as the debate goes forward in Congress and on the presidential campaign trail. But in its early stages at least, it is liberals who are on the defensive.

The aging of the baby boom generation and the costs of maintaining Medicare and Social Security have put the two pillars of the social welfare system on the table for re-examination. The growing weight of the national debt has given urgency to the question of whether the government has become too big and expensive.

The tepid nature of the current economic recovery, following big stimulus packages, has provided an opening to challenge the effectiveness of Keynesianism as the default policy option for government. And the revived energy of grass-roots conservatives has given electoral clout to the movement’s intellectual and constitutional arguments.

Arthur Brooks, president of the American Enterprise Institute, the conservative research organization, said, “The optimistic view is that we have a confluence of the business cycle, of the demography and of the politics that makes it not just possible to achieve real change, but impossible that we not deal with these things if we want this country to continue on the path envisioned by the founders.” So just two and a half years after a presidential election that was in part a repudiation of conservative governance, and with the nation still smarting from the aftereffects of a financial crisis that grew out of failures of markets and regulation, President Obama finds himself in a somewhat surprising position: forced to articulate and sell a vision of how liberalism and the institutions it built in the 20th century can be updated for the constraints of the 21st.

The speech he delivered Wednesday at George Washington University in Washington was his most ambitious effort so far to do so. In it, he harnessed the language of both left and right to argue against the extremes on both sides while suggesting that many of their core principles were not mutually exclusive — in other words, that Great Society values can endure in a Tea Party moment.

He defined “patriotism” as a shared sense of responsibility for the vulnerable and less fortunate. Basic standards of security for the elderly and poor and government investment in a more prosperous future, he said, can not only coexist with a tradition of “rugged individualists with a healthy skepticism of too much government,” but are also a vital part of what makes America exceptional.

“We are a better country because of these commitments,” he said. “I’ll go further — we would not be a great country without those commitments.”

Republicans in Congress, he suggested, would shred that tradition under cover of a debate that is only nominally about the budget. “The fact is,” he said, “their vision is less about reducing the deficit than it is about changing the basic social compact in America.”

Conservatives would and did object to his implication of heartlessness, but not necessarily to his assessment of their ambition.

The Republican plan put forward by Representative Paul Ryan of Wisconsin, the chairman of the Budget Committee, and adopted by the House on Friday as its policy blueprint for the next decade contains a substantial dose of deficit reduction but is really a manifesto for limited government.

It would take big steps toward privatizing Medicare, slash upper-income tax rates, repeal last year’s health care law, bite deeply into nearly all federal programs and try to cap the size of government relative to the economy. But it also imposes a self-consciously moral judgment on the government’s role, suggesting that the same kind of demand for added personal responsibility that was embedded in the 1996 overhaul of welfare should now be applied more broadly, to food stamps, housing aid and health care for the elderly and the poor.

“The safety net should never become a hammock, lulling able-bodied citizens into lives of complacency and dependency,” Mr. Ryan’s budget proposal says.

William A. Galston, who was a domestic policy aide to President Bill Clinton and is now a scholar at the Brookings Institution, said Mr. Ryan deserved credit of a sort for addressing head-on the implications of the Republican Party’s increasingly rigid antitax posture, which since it took root in the late 1970s has put greater and greater pressure on budgets and the social programs they support.

“It represents the first serious effort to begin to bring Republican social policy commitments in line with their fiscal and tax commitments,” Mr. Galston said.

But he said Democrats, too, faced a credibility test. “They have held fast to the security programs in place since the 1930s, but without being able to successfully challenge the antitax orthodoxy,” he said. “The problem the Democrats have is that they can no longer say with a straight face that raising taxes on the wealthy is going to enable them to pay over the next generation for the programs they cherish. So what do you do?”

That question is being asked quietly within both parties, each of which faces its own internal tensions about how to proceed.

There are Republicans who fear that voting for the Ryan plan will put them out of step with their constituents. There are Democrats who think the tax-and-spend label is all too accurate. There are Republicans who might countenance voting for tax increases, and there are Democrats who are willing to meaningfully scale back the benefits promised by Social Security, Medicare and Medicaid.

In the Senate, a group of Democrats and Republicans operating independently of party leaders is trying to come up with a plan that neither party would like but both would accept as necessary. But they are debating basic values; it would no doubt be much easier if the argument was just about numbers.

Asia

Banyan

Emerging economic powers

BRICS in search of a foundation

Apr 16th 2011, 5:20 by T.P. | BEIJING

FOCUSING on what unites them and putting aside their divisions, the leaders of Brazil, Russia, India, China and, now, South Africa—the so-called BRICS countries—ended a one-day summit on China’s southern resort island of Hainan with a joint statement that calls for far-reaching changes in the global financial and political order.

The governing structure of international financial institutions, the statement said, “should reflect the changes in the world economy, increasing the voice and representation of emerging economies and developing countries”. The statement also calls for “comprehensive reform” of the United Nations to make the body “more effective, efficient, and representative”.

Among the more specific actions and recommendations announced were an agreement for development banks in BRICS countries to open mutual credit lines denominated in local currencies; a warning over the potential for “massive” capital inflows from developed nations to destabilise emerging economies; and support for “a broad-based international reserve currency system providing stability and certainty”.

This last item would imply something of a challenge to the worthiness of the dollar as the leading global reserve currency. Indeed, the thrust of the entire meeting was to urge a realignment of the global order imposed after the end of the second world war and the subsequent ascendancy of the United States.

Representing around 40% of the world’s population and nearly a quarter of its economic output, the BRICS countries would seem to be well justified in calling for these kinds of changes. Perhaps more to the point, with projections showing that they will account for much of the world’s economic growth in the coming decades, they are in a position to push their claim.

But the unified front they presented in Hainan masks some serious differences. They will not find it easy to co-ordinate their efforts, even in the short term. Brazil, for example, has begun to fret about the influx both of Chinese investment and cheap Chinese imports, and has joined America and other rich countries in complaining publicly about the undervalued yuan.

Relations between China and India have long been plagued by tensions over trade, border disputes, and friction due to China’s political and military support for India’s rival, Pakistan. Bilateral trade is a mere fraction of what it might be for the two giant neighbours, each with a population exceeding a billion and together presenting vast potential for trade complementarities. Total trade between the two dynamos is expected to reach only $100 billion by 2015, and the balance falls heavily in China’s favour (India’s trade deficit with China was about $ 20 billion last year).

In a move that India’s press corps has portrayed as something of a snub to China, its prime minister, Manmohan Singh, chose not to attend the Bo’ao Forum, scheduled a day after and a short distance away from the site of the BRICS summit. But the two sides did use the summit as an occasion to announce a resumption of defence exchanges. These were halted last year in a tiff over China's reluctance to recognise India's territorial claims in Kashmir.

When it comes to the UN Security Council, China may not be in such a rush to see greater representation, at least not among the permanent members. BRICS solidarity notwithstanding, China, together with Russia, enjoys a spot on that exclusive five-member body and will not be keen to see its power there diluted. At the end of the day, there will be no getting around the fact that this new block of BRICS is made up of unequal parts.

How Risky is the Global Economy?

Mohamed A. El-Erian

2011-04-18

NEWPORT BEACH – Three years after the global financial crisis, the global economy remains a confusing place – and for good reasons.

Should we draw comfort from gradual healing in advanced countries and solid growth in emerging economies? Or should we seek refuge against high oil prices, geopolitical shocks in the Middle East, and continued nuclear uncertainties in Japan, the world’s third largest economy?

Many are opting for the first, more reassuring view of the world. Having overcome the worst of the global financial crisis, including a high risk of a worldwide depression, they are heartened by a widely shared sense that composure, if not confidence, has been restored.

This global view is based on multispeed growth dynamics, with the healing and healthy segments of the global economy gradually pulling up the laggards. It is composed of highly profitable multinational companies, now investing and hiring workers; advanced economies’ rescued banks paying off their emergency bailout loans; the growing middle and upper classes in emerging economies buying more goods and services; a healthier private sector paying more taxes, thereby alleviating pressure on government budgets; and Germany, Europe’s economic power, reaping the fruit of years of economic restructuring.

Much, though not all, of the recent data support this global view. Indeed, the world has embarked on a path of gradual economic recovery, albeit uneven and far less vibrant than history would have suggested. If this path is maintained, the recovery will build momentum and broaden in both scope and impact.

But “if” is where the second, less rosy view of the world comes in – a view that worries about both lower growth and higher inflation. While the obstacles are not yet sufficiently serious to derail the ongoing recovery, only a fool would gloss over them. I can think of four major issues – ranked by immediacy and relevance to the well being of the global economy – that are looming larger in importance and becoming more threatening in character.

First, and foremost, the world as a whole has yet to deal fully with the economic consequences of unrest in the Middle East and the tragedies in Japan. While ongoing for weeks or months, these events have not yet produced their full disruptive impact on the global economy. It is not often that the world finds itself facing the stagflationary risk of lower demand and lower supply at the same time. And it is even more unusual to have two distinct developments leading to such an outcome. Yet such is the case today.

The Middle Eastern uprisings have pushed oil prices higher, eating up consumer purchasing power while raising input prices for many producers. At the same time, Japan’s trifecta of calamities – the massive earthquake, devastating tsunami, and paralyzing nuclear disaster – have gutted consumer confidence and disrupted cross-border production chains (especially in technology and car factories).

The second big global risk comes from Europe, where Germany’s strong performance is coinciding with a debt crisis on the European Union’s periphery. Last week, Portugal joined Greece and Ireland in seeking an official bailout to avoid a default that would undermine Europe’s banking system. In exchange for emergency loans, all three countries have embarked on massive austerity. Yet, despite the tremendous social pain, this approach will make no dent in their large and rising debt overhang.

Meanwhile, housing in the United States is weakening again – the third large global risk. Even though home prices have already fallen sharply, there has been no meaningful rebound. Indeed, in some areas, prices are again under downward pressure, which could worsen if mortgage finance becomes less readily available and more expensive, as is possible.

With housing being such a critical driver of consumer behavior, any further substantial fall in home prices will sap confidence and lower spending. It will also make relocating even more difficult for Americans in certain parts of the country, aggravating the long-term-unemployment problem.

Finally, there is the increasingly visible fiscal predicament in the US, the world’s largest economy – and the one that provides the “global public goods” that are so critical to the healthy functioning of the world economy. Having used fiscal spending aggressively to avoid a depression, the US must now commit to a credible medium-term path of fiscal consolidation. This will involve difficult choices, delicate execution, and uncertain outcomes for both the federal government and the US Federal Reserve.

The longer the US postpones the day of reckoning, the greater the risk to the dollar’s global standing as the world’s main reserve currency, and to the attractiveness of US government bonds as the true “risk-free” financial benchmark.

The world has changed its supplier of global public goods in the past. The last time it happened, after World War II, an energized US replaced a devastated Britain. By contrast, there is no country today that is able and willing to step in should the US fail to get its act together.

These four risks are material and consequential, and each is growing in importance. Fortunately, none of them is yet transformational for the global economy, and together they do not yet constitute a disruptive critical mass. But this is not to say that the global economy is in a safe zone. On the contrary, it is caught in a duel between healing and disruptive influences, in which it can ill afford any further intensification of the latter.

Mohamed A. El-Erian is Chief Executive of PIMCO and author of When Markets Collide. This article is based on a lecture he gave at Princeton University’s Center for Economic Policy Studies.