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The US is living on borrowed dollars and, as political deadlock goes on, borrowed time. It must learn from Europe's misfortune
The American fiscal condition faces a perfect storm. The outlook for the medium term has deteriorated markedly, important causes being the Great Recession and the extension of the Bush tax cuts. Nor are the projections cheerful in the long term. And these issues will come to a head. On 4 March, the spending authority that has kept the US going in the past budgetary period is set to expire.
Last year, Congress did not pass a budget, and a special measure was put in place to legally underpin spending in the absence of an official budget. This "stop-gap" bill needs to be replaced. Another deadline is looking also: the day the US hits its debt ceiling. By law, the budget deficit must not exceed $14.3tn. It will likely reach this maximum at the end of May. To raise the ceiling would require an act of Congress.
Democrats and Republicans have hurried to the barricades in preparation for the budget battle. Actually, the term "barricades" is misplaced. Democrats and Republicans will dig themselves deeper into the trenches and only raise their heads above the parapet if the other party makes a move. Obama's 2012 budget proposal is no more than a long wishlist that offers few real solutions to the debt problem. Its main aim is to draw out the Republicans. The Democrats will try to divide the Republican party by playing off the right against moderate conservatives "“ in the hope of forcing the Republicans to come up with iron-fisted measures that would allow the Democrats to paint them as heartless.
Most likely, far-reaching reforms will be deferred until after the presidential elections in November 2012. The political climate in Washington has become so poisonous and partisan that both parties fear a catastrophic electoral outcome if they fall foul of voters. Opinion polls are responsible for some of this angst: the great majority of respondents express a wish for deficits to be curtailed while simultaneously rejecting cuts in specific programmes.
Politicians may remove the obstacles that could stop the federal government from operating in the short term: the much-vaunted "shutdown". Still, they will not tackle the essential issues. Lawmakers are yelling at the top of their voices that the US should pursue a sustainable fiscal policy, but there are five extremely costly areas of government spending that no politician would dare touch: defence, Medicare, Medicaid, tax breaks and social security. But if Democrats and Republicans fail to strike a grand bargain, eventually the markets will be merciless.
The US will end up in a vicious circle of mounting indebtedness, soaring interest rates, increasing interest payments, and even more debt. Until the start of 2013, the markets will probably show patience; but once it turns out that no major progress is made after the 2012 elections, they will rebel.
Politicians and the public will need to recognise that the present welfare state is not sustainable. Not least because the population is ageing, while untenable promises have been made and money has been squandered in the past. The western model of the democratic-capitalist welfare state is coming apart at the seams. As yet, though, no one seems prepared to make the sacrifices necessary to shape a "slenderised" version of the welfare state that is not all doom and gloom for the younger generations.
If the markets force the issue, they will demand hard choices. By then, it will no longer be possible to implement a process of gradual reform that shares the burden evenly across the population over a long period of time. Instead, discontent and uncertainty will prevail, while political populism could become even more entrenched. This will make it only harder to effect the necessary changes.
This negative scenario is not a given. Americans could acknowledge that the present course leads to the abyss. Ironically, Europe could help the Americans become aware of this. The eurozone is shaking to its foundations: its population will age sooner, and its national debts are already a heavy burden. Some countries are now facing unsustainably high interest charges. There is a lot to learn from the European example "“ if Americans take heed, there is still time to avert disaster.
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2 March 2011 11:24PM
Everybody wants to know what way the US is heading. Well its actually quite simple as we have already countries in this world which show us a US of 10 to 12 years from now. The best example is Brazil which is a democracy with unleashed capitalism:What do you get?A highly polarised country where horribly poor and disgustingly rich live side by side(some parts of LA are already like this.) The middle class will be very porous...letting people fall in and out of it constantly. The difference between the US and Brazil right now is that the American middle class is large but getting decimated while the Brasilian one is increasing due to good economic times.
3 March 2011 12:30AM
The problem is not the "welfare state". The problem is that nobody wants to pay tax, and that those most able to afford it are those most passionately opposed to the concept of paying for government services they think they don't need. What everybody needs, even rich people, is a society that is fair enough to guarantee every citizen's safety. The more unfair things are the unsafer the streets become. A few oligarchs can afford private armies and private cinemas and private emergency wards but the rest of us want to be able to go about our lives without feeling frightened all the time. In the US citizens believe their own private firearms will save them from harm, a fantasy that's disproved a thousand times every day. Fairness, a dirty word in the American dictionary, is the answer.
3 March 2011 2:09AM
The western model of the democratic-capitalist welfare state is coming apart at the seams.
We'd better hope not. You make two connected assumptions here. The first is that if the triumvirate of democracy, capitalism and welfare is untenable, then it should be the last of these that has to give. Your second assumption is that if push comes to shove, welfare will be forced from us whether we like it or not.
Neither of these assumptions is necessarily true. People have bought the conclusion that capitalism has benefited us all. Now i'm not arguing agaist that. But for a large number of people that benefit has come through the ability of capitalist economies to support welfare states. Remove the welfare state and you'll find that capitalism suddenly isn't in everyones interest anymore. We've all seen what capitalism without welfare looks like. As Voltaire2 above pointed out, it looks like Brazil. And only the rich would ever want to live under that system.
Capitalism is the best way we have found of efficiently allocating scarce resources. But if capitalism prevents most people from benefiting from this efficient use of resources then what does it matter to them how well they are allocated.
In the end it comes down to this. If working hard cannot guarantee me a health care now, and a moderate income when i'm too old, why should I bother to work hard.
3 March 2011 4:29AM
Mitch McConnell is the Senate *minority* leader, not majority.
3 March 2011 5:32AM
Interesting article. This battle is presently engaged in microcosm in Wisconsin. One point of disagreement. Extending tax cuts does not harm the economy. The notion of balancing the budget by raising taxes is based on the erroneous assumption that economic activity will remain the same regardless of the tax structure.
This is class warfare nonsense. Tax rates are meaningless. It is gross revenues that count. These are dependent on the level of economic activity and economic activity is negatively correlated to tax rates. Consequently the most amount of money that can be collected by the government is obtained by the imposition of the lowest, not the highest rates.
The key to balancing the budget lies leaving as much money as possible in the private sector and for the public sector to be as frugal as possible. The voters, as evidenced by the 2010 elections are determined to place into office those individuals that will trim government expenditures to whatever extent is necessary to restore fiscal sanity. It is already beginning at the state level and the election of 2012 will extend that wholesome attitude to the Senate and to the Presidency.
Its not that hard of a problem to solve. The jealousy and envy driven class warfare drivel has never really taken hold in the US and recent events indicate it never will. Europe and America really are different and it is difficult to project the events in one place onto the other. Here is as glaring an example of the difference as I can think of.
The father of the American labor movement was Samuel Gompers. This is one of the things Gompers said:
"The greatest sin that American Capital can commit against American Labor is to fail to make a profit."
We have an entirely different way of viewing the world and I despair that we will ever really understand each other.
3 March 2011 5:55AM
"Politicians and the public will need to recognise that the present welfare state is not sustainable. The Western model of the democratic-capitalist welfare state is coming apart at the seams".
These two propositions sum up the attempt, already started in Britain, to use the consequences of the financial crisis as an excuse to dismantle the welfare state. Not content with absolving and rescuing the guilty parties behind the collapse, these cowardly politicians are now intent in further doing the bidding for the privileged. Not only are we meant to pay for their past excesses today, we're also meant to loose out into the future.
Get lost, there is no way you're going to get away with this rip-off con trick. There are alternative to cutting entitlements, they are called taxes for the rich. Use them to extract money from them, rather than further impoverish the less well off.
3 March 2011 6:36AM
Reading the article above, one might forget the financial crisis began in Wall Street, NY, not Madrid, Spain.
Take a look at Spain, It's been hit hard by the financial crisis, yet the Spanish social security system runs a benefit. People pay more in premiums than they cost in benefits. Sure, the system needs long-term tuning - retirement age has been raised to 67 - but which system doesn't?
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