South By North Strategies, Ltd.

Simon Johnson explains “the limits of American exceptionalism.”

The ability of the United States to borrow reflects its collective strength. After a difficult struggle to establish viable public finances during and immediately after the War of Independence, the United States finally found its fiscal footing. The bicentennial of the real turning point is this year — it was the War of 1812 that finally created a political consensus for fiscal prudence, including agreement on the need to pay, with taxes, for what the government spends. The United States earned the hard way and long deserved its reputation for fiscal prudence.
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Its ability to borrow today creates what can be an advantage. When the economy turns down sharply — for example, because some big banks blew themselves up — it is much better to avoid being forced into fiscal austerity. Ask the Europeans.
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But our willingness to borrow has also become a weakness. We need to bring the deficit and our national debt under control. In large part we should restore revenues to where they were in the mid-1990s, before the rash move to lower tax rates in the mistaken belief that there was a budget surplus to distribute.