10/18/2010 03:57 pm ET | Updated May 25, 2011

Jobs, Deficits and the Coming Test of America's Democracy

In October 1988, during my term as President of the American Jewish Congress, in what I called an "Occasional Letter," sent out to influentials in this country and abroad, I referred to the history of cities I had just visited -- Istanbul, (Constantinople) Rome and Jerusalem.

The history of each of these great cities of antiquity chronicles a pattern of events which I think has relevance for our own time. For thousands of years invaders took control of each of these cities at the moment of the invader's maximum strength; ruled it for a time as their strength gradually ebbed-generally because of increasingly less talented rulers and a spoiled self-indulgent population; and finally succumbed to the next horde of invaders.

...we Americans in our relative youth as a nation and with our natural optimism pay too little attention to historical perspectives. We believe that our world leadership will last forever. [But] we continue to gird up for a military war against an enemy that is already showing its own internal weakness. At the same time, our affluent citizens indulge their insatiable appetites to consume. As a result, our debts to other nations mount, our balance of payments worsens with other this the way history will recount how our once dominant nation lost its supremacy?

Over the ensuing 22 years the patterns of conduct I decried have continued to the point of having brought our country to a terrible state. I have grave concerns for my children, my grandchildren and their generations.

My first concern has to do with jobs. I don't believe that this country will be able to create sufficient jobs to re-employ a significant portion of those presently unemployed and also provide employment for the younger job seekers coming out of school. The jobs were not lost just recently as a result of the bubbles bursting. These jobs were being lost over many years.

The bubble economy only covered up the losses by providing home owners with large amounts of money to maintain their consumption through borrowing far in excess of the asset value of their homes and through providing funding to financial companies like banks, investment banks and brokers -- both stock and real estate -- based on the inflated values of the assets they were dealing with.

The jobs were lost for two reasons. First, our businesses lost their ability to compete effectively with businesses in other countries. Whether you blame the non-competitive condition on the higher costs of labor, including huge health care and pension costs, the higher costs of management, including over-the-top rewards for corporate management, or the higher costs of government, including taxes and regulations, the fact is that step by step, year by year, manufacturing and production have moved out of America and continue to move out to other more competitive areas of the world.

The second factor is related to the sharp increases in productivity made possible by the many new inventions that allow business to increase production with ever fewer workers. One can hardly think of a function whether directly related to production or indirectly, for example, through all the new means of communication, that has not reduced the need for workers.

Millions of Americans who are facing job losses and reduced employment opportunities are also experiencing a drop in the value of their homes and in many cases loss of their homes to foreclosure. Yet, at the same time that so many Americans are suffering lower standards of living, we are faced with huge debt levels -- national, state and city, and we are running the highest deficits as a percentage of GDP than almost any time in our history. And the situation is actually worse than reported. For example, if properly accounted for with a discount rate based on realistic earnings, the shortfall in states' pension commitments would amount to $3.4 trillion, about one quarter of all federal debt.

As a nation we face a terrible dilemma. It is possible to create more jobs by spending enormous money on rebuilding our aging infrastructure. It is possible to ease the burdens on the unemployed and under employed by continuing unemployment benefits and extending health benefits. But those actions will only exacerbate our deficits and increase our debt loads. Increased debt increases the interest costs of carrying that debt and the burden on future generations of repaying at least part of it.

The decision of what to do is sharply dividing our country. The unemployed are demanding that their benefits continue and that large amount of funds be allocated to create jobs through building and repairing our national infrastructure. There is pressure to increase taxes on those more able to pay. On the other side, the employed and affluent are insisting that the nation can no longer afford to support the unemployed by increasing its deficits and debt load. Already, we are seeing rising anger by those who are worried about the deficits and debt levels and the possibility of increased taxes, expressed, for example, by the Tea Party movement. So far the discussion has been civilized, but that may be because the benefits have been continued and the unemployed still have hope of finding jobs. Once the flow of benefits stops, I would not be surprised to see massive demonstrations and maybe civil unrest of the kind we have seen in Greece and France as those nations struggle to find solutions to their economic issues.

Three overwhelming issues must be addressed at the same time. The nation must finding a way to provide financial help to the huge number of people who have lost their jobs and those young people looking for jobs, many of who have amassed heavy debt for their education. The nation must find a way at least to start to reduce debt levels so our citizens and creditor nations will see a direction that gives them some confidence. And the nation must find a way to become competitive in producing products that can be sold in a globalized competitive world. Our competitive position may be based on inventing new products or like the car companies on cutting production costs of existing products that we once made and sold successfully.

This cannot be accomplished without enormous sacrifices by every elements of our society. It will require that labor gives up hard earned health and pension benefits, that management very sharply reduce their salaries and benefits; that federal, state and city governments pare down costs across the board, including pension payments for retired employees; that taxes be raised far beyond merely eliminating the Bush tax cuts; that social security and Medicare benefits be adjusted to reduce costs. All will feel the pain of reduced standards of living - labor, management, the affluent, the old and the young.

Can the American democratic system manage such painful changes? We have taken pride in our democracy and how well it has worked. But it worked under the optimum conditions. We started with a large land mass loaded with natural resources -- oil gas, coal, forests of trees, huge areas of arable farm land and water. We have profligately used up a lot of those assets and lived well in the process. Until now, to get elected those governing us only had to grant to each constituency what it demanded. Now, is the true test. Can our democracy survive when it has to take away from each constituency something of great value? Based on how our governing system is operating currently, I am not sure. What do you think?