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Life in the Age of "Much Worse Than We Thought It Would Be"

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What was just a troubling oil spill a week ago is now, according to Interior Secretary Salazar, "a very grave scenario," and "potentially... very catastrophic."

In other words, it's much worse that we thought it would be. Has there been a crisis in the last decade that turned out to be better than we thought it was going to be? We are still fighting two wars that were going to be cakewalks, but have now lasted nine years and seven years -- much worse than we thought it would be.

Katrina looked like it could be bad but -- even though there were plenty of people warning about a Category 5 storm breaching the levees -- the devastation ultimately was much worse than we thought it would be.

Same with the housing bubble that was fueled by the Wall Street casino. Even though we now know that people in the Fed were warning of big trouble ahead as early as 2004, the warnings were ignored -- and when the bubble burst in 2008, it was much worse than we thought it would be.

The foreclosure crisis hit hard in 2009. But the government promised to protect homeowners... so when the first quarter of 2010 brought the highest number of foreclosures since they began keeping records, the scope of the calamity was much worse than we thought it would be.

In October 2009, the unemployment rate hit 10.2 percent, a 26-year high. But the $787 billion stimulus package was going to bring that down. It has, but not by much. Turns out, the unemployment crisis is also much worse than we thought it would be.

Perhaps we should start calling this the Age of "Much Worse Than We Thought It Would Be."

Our shortsighted thinking is still on full display in the Gulf of Mexico, even as the enormity of the crisis becomes undeniable. In a speech on Sunday in Louisiana, President Obama called it a "potentially unprecedented environmental disaster," and said the spill "is unique and unprecedented." And in downplaying BP's responsibility for the spill, a spokesman for the company also called it "unprecedented," saying "it's something that we have not experienced before."

That's the nature of unprecedented things -- they've never happened -- until they happen. But just because something is unprecedented doesn't mean it's unpredictable or that we're unable to plan for it. We can't see the future, but we can prepare for it.

In practically every sector of our society, the old order is exhausted. But we seem incapable of making fundamental changes without the loaded gun of a full-blown crisis pointed at our heads. For example, the financial crisis -- and what it has exposed about the behavior of Wall Street -- has caused us to rethink the relationship between Wall Street and rest of our economy. It's obvious the old way of doing things is no longer viable. But, absent the sense that everything is about to collapse, we are dragging our feet on deciding what will replace it.

And there are some other "unprecedented," "unique" -- and potentially catastrophic -- problems headed our way if we continue to accept the old order's lack of imagination about what is possible. I'm thinking, first and foremost, of our debt problem.

And no, I'm not joining the forces of those who use the debt explosion as a backdoor way of cutting or killing Social Security or Medicare. But ceding this issue to such retro-thinkers makes it that much harder to seriously tackle the problem.

America is like a patient in danger of suffering a massive heart attack. We may be able to postpone things with a bit of outpatient surgery, but we won't be able to avoid it without some serious lifestyle changes. The economic coronary isn't quite here yet, but it's on the way. And when it hits, it will, of course, be "unprecedented" and "unique." But not unforeseen -- let alone unforeseeable. Here are just a couple of the symptoms of big time trouble ahead:
  • By 2020, interest on the debt alone will reach $900 billion per year.
  • That same year, five segments of government spending -- Medicare, Medicaid, Social Security, net interest and defense spending -- will account for an estimated 77 percent of all government expenditures. All other federal spending will have to come out of the remaining 23 percent.

And a recent report by the Bank of International Settlements makes it clear that this is a worldwide phenomenon. Financial advisor John Mauldin distills the report's bottom line: "Everyone and their brother intuitively knows that the current government fiscal deficits in the developed world are unsustainable."

The numbers in the Bank of International Settlements study make this clear. For instance, in Greece, the problem child of the moment everyone is looking at with horror, government debt could reach 130 percent of GDP next year. But Greece is far from alone. In the UK, it will hit 94 percent, and continue to go up 10 percent per year. And in the U.S., we could approach nearly 100 percent. As a Greek American, I'm all in favor of the two nations co-mingling, but sporting matching crippling debt is not what I had in mind.

"While fiscal problems need to be tackled soon," says the Bank of International Settlements report, "how to do that without seriously jeopardizing the incipient economic recovery is the current key challenge for fiscal authorities."

Exactly. And those fiscal authorities also need to remember that there is more to tackling the deficit crisis than just cutting spending. Rather, we need to think bigger -- we need to re-orient our economy so that it's once more an engine for production and productivity, not a vehicle for gambling and speculation. As Mauldin says of the old -- and still dominant -- order on Wall Street: "Let's be very clear. This was purely gambling. No money was invested in mortgages or any productive enterprise. This was one group betting against another, and a LOT of these deals were done all over New York and London."

Mauldin goes on to question why large institutional investors were even gambling on things like synthetic CDOs in the first place: "This is an investment that had no productive capital at work and no remotely socially redeeming value. It did not go to fund mortgages or buy capital equipment or build malls or office buildings."

So instead of limiting the deficit debate to talk of cutting entitlements, how about also having a discussion about moving to an economy that focuses on investing in small businesses and communities, and puts a premium on education and technology rather than on exotic financial instruments.

Last year, the Center for American Progress published its deficit reduction plan, entitled "A Path to Balance," by Michael Ettlinger, Michael Linden, and Lauren Bazel. "Large deficits can reduce national savings, push up interest rates, spark inflation, and adversely affect exchange rates," the authors wrote while warning that they "also provide fodder for those who wish to block new initiatives and scale back existing programs."

The plan calls for a "sloping path" to deficit reduction, as opposed to a "dive off a precipice," and has a goal of a fully balanced budget by 2020, with benchmarks all along the way.

A few months before its plan was released, CAP hosted an event called "Progressives and the National Debt: Consequences and Solutions." Princeton economist Alan Blinder noted that "in 1980 [policymakers] knew about the year 2010 but that was really far away." Well, it's not anymore, and given that much of our deficit problem is about huge numbers of workers born decades ago now hitting retirement age, Blinder quipped that: "the long run is now the short run and they're combining."

The needs of the past and the demands of the present exert a powerful pull on our attention while the future doesn't have many advocates -- it's always something we can get to later. And there was a time when we could get away with pushing our problems down the road, secure that our reserves would always bail us out. And there was a strong safety net to catch those who fell through the cracks. Well, those reserves are gone now and the safety net is frayed and full of holes.

So before the big deficit coronary hits, and is exploited by those who've been itching to slash entitlements ever since FDR and LBJ signed them into law, let's widen the discussion, and think bigger.

For a change, let's imagine a crisis that is worse than we think it will be, and take the necessary steps to avoid it. If we don't, we'll find ourselves facing another "unprecedented" disaster.