If reality flows from rhetoric then 2011 should be the year of fiscal consolidation in the US.
The US public tells pollsters that it wants a bipartisan deal to cut the deficit. Politicians tell the public that they want a bipartisan deal to cut the deficit. Nobody is telling the truth.
It looks like there is momentum for a fiscal deal. The Republican party fought and won congressional elections in November on a vague promise to rein in a federal deficit of about 10 per cent of gross domestic product.
In early December a bipartisan commission co-chaired by Alan Simpson and Erskine Bowles came up with a plan that does just that. Barack Obama, president, and congressional Republicans then showed that they can work together by agreeing to extend the tax cuts of George W. Bush, former president, for two years.
But a host of reasons make 2011 a difficult year for a grand bargain on the deficit.
Although data are starting to look promising for the first time since 2006, the economy remains fragile. A medium-term plan for deficit control would be great. But with unemployment running at 9.8 per cent, the fiscal tightening should not start now and that makes it harder to agree on.
In spite of much ballyhoo, there is also little sign that bond market vigilantes are about to attack the US Treasury market and push up interest rates. They are still busy beating up peripheral European nations such as Portugal and have plenty of other countries more indebted than the US – Italy, Japan or Belgium – to turn to afterwards.
Relative weakness matters because, in order to attack the debt and currency of one country, speculators have to sell it in return for those of another. US Treasuries look more like a sturdy liner in the middle of the sovereign convoy, a ship you want to get on to, rather than a rickety steamer at the back waiting for a torpedo.
The gap between Republicans and Democrats is yawning and there is no vehicle to bridge it.
The Simpson-Bowles proposals, which included sweeping reform of tax rates and a cap on federal revenues at 21 per cent of gross domestic product, was a pretty good deal for fans of small government.
But Republicans who control the House of Representatives refused to endorse the plan, saying they wanted more limits on healthcare entitlements. It is hard to imagine a different deal in 2011 that could satisfy both sides and neither has reason to propose such a compromise if the other will veto it.
Both parties have reason to think they may get a better deal if they wait. For the Democrats, economic recovery may start to bring the deficit down, put the public in a better mood for sacrifice and improve their political position.
For the Republicans, bashing Mr Obama over the deficit has been good politics and continuing to do that until 2012 might bring control of the presidency and the Senate.
There is a tempting alternative for both sides, which is to spend 2011 arguing about cuts to discretionary spending in areas such as education – even though such spending is dwarfed by entitlements such as Social Security and Medicare.
For the Republicans, that is a chance to fulfil their promise to shrink government and move the starting point for an eventual deal on taxes and entitlement spending.
Mr Obama could spend the year either arguing against unpopular Republican cuts or else pointing out how inadequate they are to tackle the deficit. He could also push cuts of his own – to defence spending for example – and try to prise open divisions between Republicans who truly want to cut the deficit and those who just want to cut taxes.
There is little chance of incremental progress, such as a limited deal between Mr Obama and the Republicans on tax reform. Neither side has any incentive to give away negotiating tools they will need when a grand bargain is eventually struck.
Battle will soon be joined for the Republican presidential nomination in 2012, so this will be a banner year for rhetoric about deficit-cutting. That rhetoric might just spill over into reality. But 2013 – when the presidency is settled, the cyclical deficit is smaller and the bond market may be more threatening – looks a more likely year to solve America’s long-term fiscal problems.