Friday, February 4, 2011


The union's troubled state

In a show of civility prompted by the dreadful shootings in Tucson, Republicans
and Democrats sat side by side to hear Barack Obama’s state-of-the-union
message. But that truce could not hide the fact that the two sides have starkly
different analyses of what has gone wrong in America. And in so far as either side
has solutions to offer (which is sadly not very far), these are starkly different,
too. Everyone pretends to be in favour of bipartisan dialogue, but it is a dialogue
of the deaf.

America faces two huge, linked problems. Its unemployment rate is running at
9.4%; once you add in those who want full-time work but can find only part-time
jobs, it is almost twice that. Job creation is not even keeping pace with the rise in
population. And the budget deficit is running at almost 10% of GDP; on that
measure this year and the previous two will have been the three worst since the
second world war.

To the Republicans who now control the House of Representatives, the main
problem is the deficit and the cumulative burden of debt it brings with it. The
deficit will of course narrow as the economy recovers, but because of the
insatiable demands for health care of America’s now-creaky and retiring baby-
boomers, unless taxes are hiked it will not dip below 4% of GDP, and it will start
to rise again after 2015. That is not sustainable. Not only will borrowing on this
scale tend to crowd out more productive investment: the interest on it is already
eating up 10% of government revenue, a figure that will rise as interest rates go
up. Hence the Republican demand for swift and deep cuts. Get spending down,
shift government off the backs of the people, and jobs will return, as the invisible
hand works its magic.

Mr Obama sees things the opposite way round. His state-of-the-union speech was
an attempt to place jobs—which, according to pollsters, most Americans say are
their priority—at the forefront of the debate, and he put the deficit at the end of a
long list of concerns. After two years in which he concentrated more than was
wise on getting health reform passed, refocusing on jobs makes some sense. It is
obviously true that America’s infrastructure, both human and physical, is sub-par
(its children’s maths skills were recently placed 25th out of 34 in a ranking of
OECD countries). And it is hard to reduce the deficit while the country has a large
group of persistently un- or underemployed people.

But two large difficulties arise. First, neither Mr Obama nor the Republicans has a
workable plan for dealing with even their own main concern; and second, neither
side seems interested in dealing with the other’s priority. This is not a recipe for a
productive partnership.

Mr Obama claimed that America needs to “out-innovate, out-educate and
outbuild the rest of the word”. Yet his speech provided only the waffliest of ideas
about how it might do that, and no indication of how they might be paid for. The
parallel he likes to draw with the moment when Sputnik was launched and
America realised Russia was winning the space race falls down there, for in 1957
America’s government had piles of cash to spend on catching up. Now it has

True, some of the measures Mr Obama talked about this week, such as rewarding
schools for holding poor teachers more accountable, should not cost much. But
others—such as bringing high-speed rail to 80% of Americans and broadband
internet to 98% of them—will. And the federal government’s record suggests the
money may not be well spent: a report by the World Economic Forum puts
America at 68th in the world for the effectiveness of its public-sector spending.

Mr Obama also said far too little about what most concerns Republicans and what
led to his party’s defeat at the mid-terms: the deficit. Cutting hard this year is too risky; but laying out a concrete set of proposals on how to get the budget back
into shape from 2012 onwards is essential.

A year ago Mr Obama set up a deficit-reduction commission, which duly produced
a sensible report at the end of last year. He has failed previously, and failed again
this week, to endorse the commission’s conclusions. He offered no specific
proposals for cutting the cost of the biggest drains on the federal purse: health
care, Social Security (pensions) and defence. And, although revenues will have to
rise if the budget is to be brought into balance, he failed to explain to middle-
class Americans that they will have to pay more tax. His only gestures in the
direction of fiscal responsibility were to propose reforming corporate tax,
increasing some taxes on the very rich and extending a freeze on some
categories of discretionary spending, all of them tiny parts of the overall picture.
If he is serious about the deficit, this was the time to show it. He should have
taken courage from recent improvements in both his poll ratings and the
economy. He copped out.

For their part, the Republicans have made it clear that they have no interest in Mr
Obama’s plans to spend or invest more money. Given that they are supposed to
be the party of fiscal rectitude, that is understandable. But they, too, are failing
in their main brief, having neglected to come up with a plan for dealing with the
long-term problem caused by entitlements. The only medicine they propose is
cuts of 20% and more on parts of the “non-security discretionary” bits of the
budget (ie, on only about 17% of it) which would succeed in causing a lot of pain
while failing to solve the problem.

Both parties’ ideas are rotten, but the collision between them looks like being
worse. On March 4th the federal government will run out of money unless
Congress first passes a bill voting more; a few weeks after that, it will bump up
against the federal debt ceiling, now set at an apparently insufficient $14.3
trillion, unless, again, Congress votes to increase it. Both measures must be
passed by a House of Representatives now firmly in Republican hands, and also
require the support of seven or more Republican senators. The Republicans have
vowed to exact deep spending cuts in return for their assent. The president will
not accept these. The stage is set for a savage spring.

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