Daily Archives: March 18, 2013

The publication last week of the budgets of Republicans in the House of Representatives and Senate Democrats demarcates the political debate in Washington. Though all the press coverage is about the differences between the two proposals, there is also remarkable convergence. Some of that convergence is good news. Other aspects of the convergence threaten the future of the US as a dynamic society.

While short-term debates over macroeconomic strategy are important (how fast to shrink the deficit, for example), America’s economic future will be determined mainly by the longer-term direction of the budget. I will therefore compare the proposals of the two parties in terms of where they would like the US federal government to be in 2023, one decade from now.

On the revenue side, despite all of the apparent differences between the parties, both proposals come down to almost the same share of national income in 2023. The Republicans are at 19.1 per cent of gross domestic product, the Democrats at 19.8 per cent, and the current law at 19.1 per cent. There will be great Sturm und Drang about taxing the rich (Democrats) and lowering tax rates for growth (Republicans) but there is little practical difference in budget terms. Both parties follow the status quo: no big changes in tax collections as a share of GDP relative to the current tax system.

There is similar agreement on overall discretionary spending, the part of the budget other than social transfers and interest. Discretionary spending is being shrunk to historically low levels as a share of national income. Discretionary spending in 2013 (defence plus non-defence) now totals about 7.6 per cent of GDP. In the Republican budget, this total falls to 4.7 per cent of GDP in 2023. In the Democrats’ budget it falls to 4.9 per cent.

Despite the bold talk of the Democrats about the role of activist government in investing in America’s future, there is little substance behind the rhetoric. Their budget cuts non-defence discretionary spending from 3.7 per cent of GDP in 2012 to 2.5 per cent in 2023. And despite the Republicans’ bold talk about standing behind the military, their defence budget falls from 4.1 per cent to 2.5 per cent in 2023.

The larger difference between the two parties lies in the mandatory side of the budget, though even there it is easy to exaggerate the differences. The Republicans want to cut various transfer programmes for the poor, notably the Medicaid health programme; and of course to repeal President Barack Obama’s healthcare act. The Democrats stand behind these social programmes. The difference is 11.9 per cent of GDP in mandatory outlays in 2023 in the Republican budget compared with 14 per cent in the Democratic budget.

The final difference is in the trajectory of debt. The Republicans aim for a balanced budget by 2023, which leads to a sizeable reduction in the debt-to-GDP ratio, from 77 per cent of GDP in 2013 to 55 per cent in 2023. The Democrats instead aim for a budget deficit of 2.2 per cent of GDP in 2023, and a deficit trajectory that stabilises the debt-to-GDP ratio at about 70 per cent. In essence, the Republicans slash healthcare for the poor and reduce the debt-to-GDP ratio as a result, while the Democrats stabilise the ratio to finance these health programmes.

What conclusions can be drawn for these comparisons? First, the histrionics are in large part melodrama. The Republicans and Democrats are broadly on the same course apart from healthcare for the poor. From a global perspective, both parties would be considered on the centre-right of the political spectrum.

Second, the days of the US as the world’s policeman are coming to an end. While America’s military capacity is still far and away the largest in the world, the budget will limit its capacity to undertake adventures such as the wars in Iraq and Afghanistan. It is no coincidence that Mr Obama is shying away from direct engagement in Syria. That is as much fiscal constraint as foreign policy choice.

Third, both parties have accepted the declining role of federal government in domestic economic problem-solving. The Democrats have a list of initiatives in education, infrastructure, clean energy and other areas, but these are very small in macroeconomic terms, more than zero but far too small to make a national impact on America’s large economy. The Democratic budget, for example, calls for a new infrastructure bank capitalised at $10bn, which comes to all of 0.06 per cent of GDP, when the estimated backlog of infrastructure replacement and renovation runs to several trillion dollars.

Each observer will have different attitudes towards the budget convergence. My own are the following. I am glad the two parties are focusing on stabilising, if not reducing, the debt-to-GDP ratio. This is salutary. The differences do count. The Republicans are truly cruel to propose balancing the budget by cutting healthcare for the poor, while the Democrats are shortsighted to plan for sizeable budget deficits rather than consistently higher revenues as share of GDP.

I am absolutely delighted that the military-industrial complex is finally on the chopping block. The recent military adventures have been expensive and destructive tragedies. America can be safe, indeed safer, at much lower levels of military outlays. Yet the cuts in future defence spending are by no means guaranteed. The military lobby is relentless.

I worry deeply about the bipartisan squeeze on public investments in infrastructure, science and technology, education and job skills. Both parties, averse to taxation, have failed to appreciate the scale of public investment needed. The two parties have converged on a massive underinvestment in America’s future.

The writer is the director of The Earth Institute at Columbia University in New York and author of ‘The Price of Civilization’

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