US Budget: Money Worries

What kind of safety net is the United States (US) prepared to pay for? What kind of government intervention in the private sector is appropriate after the biggest recession since the Great Depression? What kind of tax burden should be shared, especially by the wealthiest Americans? Those questions lie at the heart of each of the painful clashes over the budget and deficit between Republicans and Democrats this year.

The World Today
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A year and a day after President Barack Obama signed the giant Recovery Act into law - pumping more than 800 billion dollars of borrowed money into an economy in deep recession - he sat down at a small desk in an elliptical room, decorated with elaborate wallpaper depicting classic American scenes. Next to a tableau of native Americans greeting white settlers, Obama scratched his name on a piece of paper which promised to chart a very different course for the US government.

After spending as much stimulus money as his predecessor spent on the wars in Afghanistan and Iraq, it was time to talk about cuts. Not immediate cuts perhaps; at least not in an economy still struggling to sustain job growth. But still ambitious ones, aiming to reduce the deficit from eleven to three percent of GDP within five years.

Obama’s signature created a fiscal responsibility commission, which was in many ways a sign of widespread agreement in Washington. Originally a Republican idea, it was embraced by a Democratic president and consisted of equal numbers of elected officials fromboth parties. Everyone agreed about the scale of the problem, if not the timeline for action and the future balance between taxes and spending.

Yet the commission was dead on arrival, a little more than a year ago. Seven Republican senators who proposed the panel voted against its creation, spooked by the idea that it might suggest raising taxes. Another 23 Democrats joined them to oppose it before anyone was named to work on any recommendations. Congress would never vote on its ideas.

Instead, a year later, the budget debate turned so ugly that both sides were ready to shut down the US government.While shutdown was averted by a matter of hours, attention rapidly turned to the previously unthinkable question of whether the US might default on its debt if Congress refused to raise Treasury’s borrowing limit. In the midst of talk about the apocalyptic effects of default, both Republican leaders and President Obama offered up competing frameworks for reducing as much as four trillion dollars of debt in the next decade or so.

Such budget battles might seem bizarre to international observers, who might reasonably expect their own governments to collapse in the face of such financial chaos. But in the American system, the power of the purse-strings lies firmly with the Congress, not the president and his administration.With a divided Congress - where Republicans control the House, and Democrats control the Senate - you can either blame the voters or the founding fathers for the budget deadlock.

But you would be better off understanding that the messy, petty and often reckless arguments about the federal government budget and long-term deficits are part of a much bigger,more fundamental debate,whichwill remain unsettling and unresolved until at least the 2102 presidential election.

For this debate - which will likely dominate the presidential campaign - is about nothing less than the size, scope and role of government. To conservatives, President Obama represents a European-style socialist expansion of government that threatens to crush free enterprise and bankrupt the public finances. To progressives, Obama represents a timid, centrist sell-out to business interests,who blewhis chance to restructure Wall Street and health care. Stuck somewhere in themiddle is a White House that has rescued the financial and auto industries, simultaneously preserving a safety net for the unemployed and tax breaks for working families, while investing in education and infrastructure.

The important questions at the heart of the budget debate can only be answered by voters next year, who will be facing an imminent tax rise across the board just one month after they vote. This is because the White House and Republican leaders agreed to just a two-year extension of the GeorgeW. Bush-era tax rates late last year, knowing that the presidential contest would thrash out these issues all over again.

Allowing those tax cuts to expire would solve three-fourths of Washington’s deficits in the next five years. After that, deficits would rise with an aging population, requiring long-term action especially to limit the sharply rising costs of health care for older Americans, known as Medicare. There is bipartisan agreement that the tax cuts should not expire for everyone: both sides agree that working and middle-class families should be exempt. Still, the tax debate hits on a bigger dispute about the timeline required for action: between the short-term needs of a struggling economy and the long-term realities of deficits accumulated over the last decade of sweeping tax cuts, protracted wars, and new government spending. Can the US afford to raise taxes now? Can it afford to wait to cut spending later?

Inside the WestWing, the budget debates are seen not just as a contest between Republicans and Democrats, but among Republicans themselves. With a huge influx of new House members, many of whom were backed by the Tea Party and are new to elected politics, the Republican leadership is struggling to satisfy its new ideological purists. Raising the debt ceiling may well be the biggest test of whether Republican leaders, especially House speaker John Boehner, can satisfy business leaders (who want to end all talk of default) as well as the new deficit hawks (who say they are ready to vote against raising the debt ceiling, which would prompt default). At the same time, Republican presidential candidates, such as Michele Bachmann from Minnesota, are trying to appeal to the same Tea Party movement to win next year’s primaries, adding further pressure to conservative leaders in Washington. “In the first two years, their strategy was to obstruct and it was successful,” said one senior Obama aide. “And they got these eighty or ninety new members of the House, and they got new senators. But be careful what you wish for. I don’t think they would want the country to default, but the problem is they have to feed the beast and they’ve got these members in the House. It’s an open debate how much control Boehner has over them or not. I’d like to believe he’s got enough control and is just trying to get as much as he can. But I’m not sure that’s the case. You hear Michele Bachman saying what is the matter with default? What’s the problem? And these Tea Party people are saying they have to stand firm. So who knows?”

That is not to say the White House is free of ideological constraints. - far fromit. Obama’s aides may be banking on the fact that Republican leaders do not want to be blamed for the financial collapse that would follow a US default. But the White House also knows that it has to offer significant steps towards deficit reduction to win even begrudging support in Congress - not least because there are several moderate Democratic senators who will move ahead with deficit reduction in any case. Democrats are faced with a stark political choice. Do they propose substantial changes to the so-called entitlement spending of social benefits, as their moderates want? Or do they continue to seek electoral advantage against Republicans over cuts, as their most partisan supporters want?

At a time of dramatic political change, and with another election campaign already gearing up, the challenge of dealing with the deficit is even greater than normal. Combined with a rapidly evolving media environment, whose news cycles have shortened dramatically, the debt debate is playing out in unpredictable ways. “This is a chessmatch,” said another senior Obama adviser. “The question is, how do you end up in a place that is acceptable? You certainly don’t get there if you view every day as the pivotal moment in the chess match. You don’t always make the typical move.”

Watching the world’s biggest economy reshape itself in a series of threatened crises and chess moves is undoubtedly unsettling to its trading partners. When President Obama travels to Britain in May, the debt ceiling debate - and the risk of default - is likely to be unresolved. At the same time, Britain’s experience of austerity will provide a sharp contrast: a government dealing with debt in an economy that appears to be slowing down. The British trade-off between debt and growth may make sense in Britain. But in the US, the politics and the culture play out differently. As British Prime Minister David Cameron has pointed out, the dollar is the world’s reserve currency, allowing the US president far more latitude with international borrowing.

America’s debts are nothing new. The revolutionary war against Britain was financed by several rounds of debt, which was later consolidated by Alexander Hamilton, the first Treasury secretary, in a bailout of the states that was no less controversial than the recent bailout of Wall Street. America’s tolerance of public debt owes something to the self-confidence that comes with a long history of economic expansion.

Still, some attitudes towards debt are shared across the Atlantic. American voters say they are overwhelmingly supportive of balancing the budget, including a constitutional amendment to ensure that forever.Yet they also overwhelmingly oppose the kind of cuts to social programs that would, in fact, balance the budget forever. And they overwhelmingly believe that Republican proposals for cuts are unfair.

When he created his fiscal responsibility commission in the White House mansion a year ago, President Obama knew full well how politically fraught its work would be. Yet he urged both sides to live up to their own rhetoric. “There’s some on the left who believe that this issue can be deferred,” he told a small group of reporters in the Oval Office. “There are some on the right who won’t enter into serious discussions about deficits without preconditions. But those who preach fiscal discipline have to be willing to take the hard steps necessary to achieve it.” Among those doing the preaching: one Barack Obama.