It’s a rare moment when a nation, much like a prodigal son, admits it has borrowed too much and then sets its finances in order. Americans now mostly agree their national debt is a threat to the economy. But the “fiscal cliff” negotiations in Washington show they don’t yet see the long-term benefits of belt-tightening.
Talks between Democrats and Republicans still mainly focus on which Americans will lose and which will gain. Whose taxes will go up? Whose entitlements will be cut? The recent election didn’t make that task any easier.
One estimate, made by the International Monetary Fund, is that fixing America’s fiscal imbalance will require a one-third cut in government benefits and a one-third rise in tax revenues. The IMF should know. Its job for decades has been to force overspending nations to set their finances in order if they want its seal of approval for more foreign loans and investment.
The IMF’s tough love has worked pretty well in many nations to get them to fess up to past profligacy and then sign on to a measured pace of budget cuts, better regulations, and new revenue. Much of Latin America and parts of Asia and Africa have seen that light.
America’s current debate would benefit from the IMF’s main lesson about the future promise of fiscal discipline: A nation that takes its lumps quickly won’t regret it. Or rather, the admission of past errors and embrace of temporary sacrifice will bring out the fatted calf of economic growth.
Greece is not a model. For three years, it has been short on confessing to its fiscal deceit and long on clinging to government excess. Nor is Argentina, which has largely defied the IMF and creditors, resulting in rampant inflation and crumbling infrastructure.
The best current model is Latvia, a Baltic state that has rediscovered the virtues of thrift and done well by it.
During the 2008-09 economic crisis, the former Soviet state of 2 million people nearly defaulted on its debt. But it then made wrenching sacrifices – cutting government jobs, spreading the tax base, reducing welfare. The result is that Latvia now has the highest growth in the European Union. It has restored its credibility with financial markets.
“Latvia decided to bite the bullet, and instead of spreading the pain over a number of years, it decided to go hard and go quickly,” said IMF chief Christine Lagarde. She calls its policies “a tour de force.”
Ms. Lagarde says the debate about whether to emphasize austerity or growth is a false one. A nation can do both.
Sacrifices may not seem like suffering if Americans know a country can thrive again by standing on the rock of fiscal discipline.