Briefly, The Washington Post-ABC News poll released today indicated that the American people do not support the kind of sacrifices that would be required to put the nation on a sustainable fiscal course. Even as Medicare is the leading driver of the nation's long-term fiscal imbalances, a strong majority of Americans opposes cutting Medicare spending. Fully 78% of respondents opposed Medicare spending reductions. 65% strongly opposed such savings. In a separate question on Medicare, When it came to Medicaid, 69% opposed Medicaid cuts. 52% strongly opposed them. 53% of Americans also opposed the combination of tax hikes/small reductions to Medicare, Medicaid, and Social Security. 72% did support raising taxes on those with incomes over $250,000, but even massive tax hikes focused on that sector would not eliminate the nation's long-term imbalances even as it would dramatically undercut private capital investment (creating a flatter long-term growth trajectory).
This news is troubling, because it suggests that either the American public is not yet sufficiently informed about the magnitude of fiscal imbalances/drivers/steps needed and/or, even if it is sufficiently informed, is unwilling to make the sacrifices necessary. Given the growing coverage the nation's debt has received, the two debt commissions, and heated political debate tied to the FY 2011 spending bill, a lack of familiarity would be disturbing in its own right. It would suggest the kind of obliviousness to key issues that undermines informed civic engagement.
Strong leadership will be imperative if a meaningful fiscal consolidation path is to be agreed this year. The nation's political leaders will need to make deeply unpopular choices and sell the American people on those choices. Whether such leadership will be forthcoming remains to be seen. S&P has its doubts.
Even if tough decisions are agreed this year, an equally important issue will concern whether those decisions will be implemented or terminated. In a democratic society, a wide gap between public opinion and the policy framework cannot be sustained indefinitely. Ultimately, the gap is typically eliminated from the election of new leaders who change course. A transformational leader who can bring people together can close the gap by persuading the public so that public opinion changes. That is a less common scenario than the former. Most leaders--corporate and political--are not of the transformational variety.
Finally, delay in laying out a credible fiscal consolidation path and launching implementation will only exacerbate the situation. The long-term imbalances will grow even larger on something even close to the current policy path. In addition, every decision that is made today that postpones credible fiscal consolidation could reduce the United States' strategic flexibility going forward e.g., acting now when the U.S. is in a period of abnormally low interest rates would be optimal; trying to react when interest rates are rising (either due to a continued cyclical recovery, possible onset of inflation, or rising risk premia) would make things far more complicated. In the former scenario, the impact on macroeconomic growth could be somewhat limited. In the latter, it could be substantial and adverse (shift in capital flows, larger fiscal consolidation needed due to higher debt servicing costs or worse, lack of transition due to declining access to credit, etc.).
