Doing the Right Thing

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by Niall FergusonApril 17, 2011

America finally comes to its senses and faces the fiscal facts.

“The United States will always do the right thing—when all other possibilities have been exhausted.” Thus Winston Churchill, who, as the son of an American mother, was entitled to say such things.

After a week on the road with my own 100 percent British son, visiting possible colleges from Dartmouth to Duke, I can confirm that the United States is finally getting close to doing the right thing.

Ours was quite a trip. It began in New Hampshire and took in Maryland, Massachusetts, New York, North Carolina, and Washington, D.C. We saw crunchy snow in the North and felt baking sunshine in the South. And we didn’t just do colleges. We also did conferences.



The odyssey began in Bretton Woods, N.H., at the Mount Washington Hotel, where, in 1944, the foundations for the postwar global economic order were laid. The shadow of John Maynard Keynes seemed to hover over the proceedings of the second meeting of the Institute for New Economic Thinking, founded in 2009 by George Soros.

Keynes was a believer in government deficits as a short-term expedient to combat depression. But even he would have regarded America’s current fiscal trajectory as disastrous. According to the Congressional Budget Office’s alternative fiscal scenario—which it sees as politically more likely than its baseline scenario—the federal debt could hit 344 percent of GDP by 2050. Interest payments would absorb nearly all federal tax revenues.

Keynes would also have been dismayed by the extent of America’s reliance on foreigners to finance its borrowing habit. Small wonder the No. 1 topic of discussion at Bretton Woods was the relationship between the United States and its primary creditor: the People’s Republic of China. The consensus at the conference was pretty clear. It’s not just that the Chinese need to wean themselves off an undervaluedexchange rate. Americans need to kick their deficit habit, and the money printing that goes with it.

Conspicuous by its near absence from the discussion was the Middle East, where real wars rather than currency wars are the worry. To grapple with America’s foreign-policy challenges, we had to get ourselves from Mount Washington to Washington, D.C., and the founding meeting of the McCain Institute, a new strategic think tank to be set up this year under the auspices of the University of Arizona.

The consensus around this table was that American foreign policy was in disarray and that the Arab Spring was unlikely to be followed by a summer of love in the Middle East. But what to do, with the military already overstretched and the defense budget set to fall from 5.1 percent of GDP to 3.4 percent by 2016? Something’s got to make way for all those interest payments, after all.

The most heartening thing about our road trip was the realization that such questions are not only on the minds of statesmen and professors. The students we met were also eager to discuss finance and politics. Even Joe Public now gets it: according to Gallup, 17 percent of Americans now see the deficit as the biggest problem facing the United States, compared with just 5 percent six months ago and practically zero a year ago.

Churchill had it right. The United States will always do the right thing once all the other possibilities have been exhausted. For a long time many people clung to the delusion that the United States could simply borrow $1 trillion a year for the rest of time. Now only two possibilities remain.

The first possibility is the one devised by Rep. Paul Ryan, which would eliminate the deficit largely through deep spending cuts and Medicare reform. Possibility two is President Obama’s bid to close the budget gap with more modest cuts and tax hikes on “millionaires and billionaires.”

It’s a bracingly binary choice. Shrink the government. Or squeeze the rich. It will be worth my son’s coming to college in the U.S. just to see which of the two Americas he chooses.

YA: Neither will be sufficient by itself.