When President Obama told Americans that this is “our generation’s Sputnik moment,” he might have been speaking about more than the pressures of international competition and the need for technological innovation. It turns out that the United States’ position at the start of the space race offers some other parallels to our situation now: Tax revenue is the lowest it has been since 1950, thanks to tax cuts and the recession. Obama’s budget plan purports to reduce discretionary spending to Eisenhower-era levels, as well. The national debt is at its highest level since the end of World War II. The most important parallel: We, too, face a choice.
Under President Eisenhower, the economy shifted from war production to what economist John Kenneth Galbraith described as a dynamic tension between Big Business, Big Labor, and Big Government. That economy ultimately generated decades of robust, shared growth. Now we face a version of the same challenge, complicated by an aging population and a growing, not shrinking, debt burden: Thanks to the pressures of globalization and innovation, we have endured a decade of weak growth and stagnant employment. The country is moving into an economy that is different from the one our public policies were built on. What’s more, no consensus exists about how the economy will expand in coming years, if at all, and how the benefits of any expansion will be distributed.
The old saw is that politicians campaign in poetry and govern in prose. It isn’t true. Politicians govern in budgets. It’s a translation function, and sometimes an easy one: A promise to double education funding is multiplication. But what’s the proper math to “win the future,” the Obama administration’s current economic refrain? Or to “unshackle our economy,” as House Budget Committee Chairman Paul Ryan, the Republicans’ leading voice on fiscal issues, described his party’s goal?
The president’s fiscal 2012 budget, released this week, and the Republican alternative that Ryan will produce in April, offer more than the concrete details of running government. They are vehicles for each side to explain how economies succeed in the modern era, and to answer the related question of how to keep the government sustainable over the long term. Both efforts will sit uneasily in the shadow of a recent report from the president’s fiscal commission chaired by Republican Alan Simpson and Democrat Erskine Bowles, a bipartisan deficit-reduction plan whose adherents proffer it as a responsible baseline.
The initial clash of ideas will come over discretionary spending, the year-to-year appropriations that underwrite government functions but don’t contribute much to the deficit or the debt burden. Both plans are rooted in the economic costs of the recession, revenue loss from the Bush tax cuts, and rising health care costs. Although members of both parties agree, at least superficially, on the need to address the long-term problem of sustainability, they don’t agree about how to start doing that while still encouraging growth. Democrats favor targeted investment and smarter interventions; Republicans desire a reduced government footprint and fewer interventions.
The budget and the economy are deeply interrelated: The economy’s growth keeps revenues flowing into government coffers, and at the most basic level, both parties agree that the government shapes the private sector through regulation and monetary policy. But fundamental disagreements at the next level up preempt an easy compromise on the budget’s key question: How should the government encourage economic growth?
FREEZE AND INVEST
The walk across Lafayette Square from the White House to the U.S. Chamber of Commerce takes just a few minutes, but when the president took it on an unseasonably warm day last week, he was crossing two years of unpleasant history. Obama’s relationship with the business community had soured, despite record profits and successive steps toward recovery, because his agenda, from health care to energy reform, insisted on restricting business practices that he considered contrary to the public interest. In some cases—notably, his overhaul of financial regulation—the president believed that the policies he pushed through were also in the interest of businesses themselves. The chamber disagreed and spent millions of dollars opposing Obama, his fellow Democrats, and his policy proposals.
Facing ascendant Republicans whom those millions helped to elect, and desperate for businesses to increase investment and job creation, the president finally crossed the square to make a formal address to the chamber, something nearly every president has done in the 99 years that the business lobby has existed. Progressives complained about the outreach to the country’s largest lobby, but Obama’s remarks were more scolding than fawning. Just as government has responsibilities to business, he said, the private sector has responsibilities to the public interest.
He spoke in the chamber’s Hall of Flags, each emblazoned with the coat of arms of a golden-age explorer—Henry Hudson, Ferdinand Magellan, Sir Francis Drake. The business group sees their entrepreneurial spirit, risking their lives to explore the unknown for the promise of riches, as instructive for today’s capitalists.
It may also be instructive, however, to remember how these men obtained the financing for their endeavors. Monarchs and state-chartered companies—the government—provided start-up money for the adventurers, and often granted them monopolies on the trade they might begin or substantial grants of land they might discover. The profit motive begat the explorers’ strenuous efforts, and the investment returned to the crown in the form of new revenues and resources from abroad.
This was the age of mercantilism—governments taking control of economies to compete against other nations in a zero-sum battle for global advantage. Today we speak of neomercantilism, as China’s aggressive growth strategy, predicated on state-sponsored firms and export-favoring currency policy, has its economy growing on pace to overtake our own in the next few decades. Given China’s population and resources, such a change was inevitable.
But the Chinese ascent is raising questions in Washington. Is the consensus that prevailed under the Clinton administration—global economic changes are a positive-sum game—still true, or is the new reality “success for me beggars thee”? These tensions have put Obama in the position of arguing that China’s rise can be an economic benefit to the United States—arguably, it already is—and also that the United States must out-compete, out-innovate, and out-educate China and other nations seeking to supplant America’s dollar-driven hegemony.
“You’ve got over a billion people in China who are suddenly plugged into the global economy,” Obama explained in a December speech in Winston-Salem, N.C. “That means competition is going to be much more fierce, and the winners of this competition will be the countries that have the most educated workers, a serious commitment to research and technology, and access to quality infrastructure like roads and airports and high-speed rail and high-speed Internet.”
So, the hybrid economy, driven by the private sector but encouraged by public investment, is coming out of the shadows. We’ve long lived the results of this economy: Eisenhower’s highways created major opportunities for commerce, and the government financed the invention of the Internet as a national-security project. But after the labor market’s lost decade and a massive economic crisis, policymakers see the need to consciously update this arrangement to craft the foundations of 21st-century expansion.
Obama, in no small part because of the 2012 elections, sees economic growth as the critical mission of this budget, but the administration’s approach is different from the dramatic, short-term policies that characterized its immediate reaction to the recession. “We are neither five-year planners nor abject laissez-fairians,” White House economist Jared Bernstein said in a speech last week. During the recent crisis, he contended, policies such as the controversial Troubled Asset Relief Program and the fiscal stimulus greatly extended government’s role in the economy at a time when the private sector was crippled. Now, Bernstein and other administration officials argue, laying the foundation for growth demands more-limited and specific government intervention.
That is the logic of the administration’s freeze on domestic discretionary spending—growth requires investment in infrastructure, innovation, and education, but cuts elsewhere in the budget keep overall spending from increasing. When Obama rolled out his budget at a Baltimore middle school on Monday, he compared it to a family’s decision-making on spending and saving. “If things get a little tight, you may stop going out to dinner or stop going to the movies,” he said, “but you’re still going to make sure that you’re paying for the things that are really important, like heat or fixing the roof, or your parents are setting money aside for your college education.”
Given the fiscal situation, the administration cannot maximize its investment, so it emphasizes policies that accelerate growth while minimizing the budget impact, such as removing trade barriers and burdensome regulations. Obama also wants to overhaul a corporate tax code that has become, in the words of an administration official, “more holes than cheese”—and inclined to push businesses toward inefficient decision-making and debt-financing.
Obama’s progressive allies say that his vision displays a poverty of ambition; his acceptance of the need for austerity in a time of 9 percent unemployment seems disconnected from the reality of working people. If the budget debate is between Obama’s freeze-and-invest plan and Republicans’ cut-and-grow formulation, liberals say, then policymakers are missing the point.
“If your lodestar was, how do we preserve a future middle class, your conversation would be so different,” Heather McGhee, the Washington director of the progressive policy organization Demos, says. “If you were just trying to lower the unemployment rate, your conversation would be so different.” Demos’s own budget plan argues that deficit reduction and job creation can go hand in hand; the group’s findings indicate that every million additional jobs created reduces the deficit by $54 billion.
The business community is on board with Obama’s agenda, at least in spirit. Its leaders are happy that the White House is interested in productive investments and a growth-oriented tax code, but they are skeptical about the administration’s seriousness toward deficit reduction.
Corporate lobbyists point out that the unwieldy U.S. debt will eventually lead to higher interest rates and unstable financial markets. With all indicators suggesting that the country is years away from those consequences, however, their fundamental worry is that unaddressed spending will prompt increases in corporate taxes. The administration’s unsuccessful push to reel in tax dollars deferred by corporations abroad has the business community nervous that Washington will next look to other ways to tax their profits.
The interdependence of the private sector and government, implicit in the chamber’s flags, may be best summed up by Harold Jackson, a group member who attended Obama’s speech and thought it hit the right marks, even though he worries about high government spending. Jackson, who runs a medical-supply business in Colorado, says that regulation hurts his firm. Asked for an example, he cites federal procurement rules. Finalizing a contract with the government took him two years, during which time he laid off workers. A member of a Small Business Administration advisory board, he hopes to see the rules streamlined.
“Whether we’re going to get everything we want, I don’t know,” Jackson said after the speech, laughing. “We probably won’t, and we probably shouldn’t.”
CUT AND GROW
Paul Ryan—“just as smart as he sounds, a little older than he looks, and the right guy for this time in history,” as introduced at the Conservative Political Action Conference by Matt Schlapp, a White House political director under President George W. Bush—took the stage to brandish his wonkish conservatism before a crowd of right-leaning activists. The Wisconsin Republican, whose committee job has made him the administration’s primary interlocutor on fiscal issues, wasted no time in describing the terrain: “We are engaged in the battle of the American idea.”
Ryan made his name in Washington with his oft-cited, rarely endorsed “Road Map for America’s Future,” a detailed plan to reduce the deficit and debt that cuts spending, overhauls the tax code, and radically changes Social Security and Medicare. Although analysts dispute the efficacy of his path—the Tax Policy Center has suggested that his revenue estimates don’t add up but could, with some changes—Ryan gained plaudits for digging into the numbers and producing a credible and conservative fiscal vision. A member of the president’s fiscal commission, he, like his House GOP colleagues on the panel, was unwilling to support its final plan because it matched spending cuts with revenue increases. (The Republicans’ Senate delegation, including Oklahoma’s fiscal conservative, Tom Coburn, endorsed the plan across the board.)
Unlike Obama, Ryan states his budget ideology unapologetically. “It is not merely a mathematical exercise,” he told a crowd at the American Enterprise Institute last year. “It’s really a cultural decision over who we are and what kind of country we want to be.”
Ryan asked, “Do we want to have an opportunity society with a safety net where we are pushing prosperity to its limits, where we are extending the economic growth to more and more people, where we are reclaiming the American idea of incentivizing entrepreneurship, hard work, production, achievement, and growing our economy, or are we going to go down the path of having a cradle-to-grave, European-style social welfare state?”
There is perhaps more straw than man in Ryan’s targets here, but contrasted with Obama in North Carolina, he paints a very different picture: An emphasis on making and keeping taxes low and flat so that they don’t distort economic decision-making, limiting any dependency on the social safety net, and, most important to Ryan, reducing government spending to avoid the deleterious effects of debt on the economy. “What I’m trying to put out there is a plan for prosperity,” he says. “It is a plan to preempt a debt crisis from actually occurring.”
Concerns about the impact of government debt—currently equal to 53 percent of gross domestic product, and rising quickly—are widespread and are driving a fierce debate over how fast the government must embrace austerity. Many argue that our public obligations are manageable, if nervous-making, but others fear the onset of a Greek- or Irish-style sovereign-debt crisis in the United States, a tempest that would roil financial markets worldwide and severely damage prospects for growth.
Economist Kenneth Rogoff, one of the most respected students of financial crises, has been among the pessimists when it comes to U.S. fiscal policy, but even he says that a crisis is five to 10 years away if nothing is done about the debt. Core inflation is at all-time lows, and the government can still borrow at relatively low interest rates. But, just as Obama would have proposed his investment agenda regardless of the economic situation, Ryan’s Republican argument isn’t really about near-term issues but about a long-term view of how to achieve economic success.
“We are neither five-year planners nor abject laissez-fairians.” —White House economist Jared Bernstein
Ryan mocks Obama’s “investments” as a different word for spending, arguing that policies such as the stimulus package did not offer much return for taxpayers; after all; unemployment remains high and growth low. Ryan, an ardent free-trader, prefers to focus on competition among companies rather than among countries, and he is suspicious of the short-term impact of temporary spending or tax cuts.
He believes that the better path to growth is simply to get government out of the way entirely, set a level playing field, and let Americans do the rest. Although that may not provide much relief in the short term, Ryan’s budget will suggest that the White House has its cost-benefit analysis flipped upside down: Where the Obama team sees the costs of today’s investments yielding benefits tomorrow, Ryan sees those costs taking the economy to the tipping point, and soon.
Ryan’s critics point out that his plan would essentially privatize Medicare and Social Security, but he retorts that without changes, the entitlements will be gone for his children, asking the audience at AEI, “Doesn’t it make sense to make changes to these programs so that they’re actually sustainable, so that they’re actually solvent, so that they’re actually programs that we can depend on?” The Republican budget is unlikely to go as far as Ryan’s road map, but conversations over a Medicare voucher system continue among House GOP leaders.
“I see this challenge as an opportunity to rebuild what Lincoln called the ‘central ideas’ of the Republic,” Ryan said during his response to the State of the Union. For Ryan and the earliest Republicans, a central belief is that free enterprise provides the opportunity for each person to earn his or her own capital, thus equalizing the distribution of wealth.
Lincoln’s party, however, also “took a broad view of the power of the federal government to aid in economic growth,” including land grants and economic-development initiatives, historian Eric Foner wrote in his classic book on the GOP’s founding ideology, Free Soil, Free Labor, Free Men. These early Republicans were capitalists, and free-traders, but they were infused with Whiggish ideas that led them to support funding for public schools, canals, and roads. Abraham Lincoln was by no means a New Dealer, but he would have recognized the language of investment—indeed, Obama may have more claim to Lincoln’s economic policies than the modern Republican Party does.
If our assumptions about how the government can spur growth require a rethink, the U.S. approach to entrepreneurialism may also be due for revision. Small business has, until recently, been hailed as the font of job creation, but new research suggests that young businesses are in fact the most likely to hire. Both budgets will talk of opening doors to these start-ups by simplifying the tax code and other measures, but Democrats will argue that their health care overhaul helps business creation by easing at least one burden on new employers. This may be in keeping with international trends.
A recent story in Inc. magazine points out that socialist Norway and Denmark, along with Canada, have more per capita entrepreneurs than the U.S., thanks to a resilient social safety net that creates opportunities for risk-taking. All three nations weathered the financial crisis comfortably. European countries with the lowest tax rates—notably, Estonia, Iceland, and Ireland—have been crushed by recession and unemployment.
In fact, this debate can be seen as a historical one: Was past U.S. economic success the result of entrepreneurs working in a free market, or of growth-oriented government policies, or of some combination of the two? How you answer that question determines the budget you prefer, but it’s wise to remember the chamber’s Hall of Flags if the answer appears too neat.
DON'T FORGET THE SENATE
Treasury Secretary Timothy Geithner criticized the Republican agenda as “too dark a vision of our future.” House Speaker John Boehner retorted that Obama’s budget “will destroy jobs by spending too much, taxing too much, and borrowing too much.” Where shall the twain meet?
Likely in the Senate. The upper chamber will probably be tasked with reconciling the two competing budgets. Already, a bipartisan group led by Budget Committee Chairman Kent Conrad of North Dakota; Coburn, his fellow commission member; Virginia Democrat Mark Warner; and Georgia Republican Saxby Chambliss, is building legislation based on the Simpson-Bowles commission’s report. Although the Democrats who control the Senate agree with many of the presidents’ priorities, they keenly feel the political pressure to balance them with deficit reduction.
Many in the White House argue that they put a serious down payment on entitlement reform with last year’s health care overhaul, an idea confirmed by the fiscal commission’s report, and they scoff at Republicans who argue for long-term solutions but reject cuts in Medicare that helped fund efforts at universal coverage.
The White House has offered corporate tax reform as a pilot to test its ability to cooperate with congressional Republicans; similarly, if bipartisan Senate discussions about legislating the blueprint prove fruitful, the White House would find it easier to embrace that sort of big-picture reform. What the administration is not prepared to do is support the sweeping and immediate cuts to discretionary spending that the GOP sees as a necessity, even though its own budget offers harsh reduction in programs it values, including one that subsidizes heating oil for the poor.
Another challenge to a significant budget deal could be called the “elected Republican” problem—as in, few elected Republicans are willing to talk about any kind of tax increase. Two-hundred-thirty-seven House members and 41 senators have signed the Americans for Tax Reform pledge to oppose any tax increases and loophole-closing that isn’t revenue neutral.
Conservatives who do not hold elective office, however, believe that revenue will need to rise as part of a fiscal deal; many support consumption tax measures, which they say are more efficient. Among this group are Bruce Bartlett, the former Reagan administration official; Alan Viard, a tax expert at the American Enterprise Institute; and Simpson, the fiscal commission’s cranky cochairman and a former senator from Wyoming.
“It’s not just a question of total spending and total revenues, [but] how smart is the spending”—making sure it is “growth friendly,” Federal Reserve Board Chairman Ben Bernanke, a Bush appointee, told Ryan’s committee last week when asked about immediate cuts. Although Coburn and Sen. Mike Crapo, R-Idaho, signed on to the fiscal commission’s report, which does propose raising revenue, that approach isn’t popular with the GOP base, and it will likely take time for elected Republicans to move toward the fiscal grand bargain desired by those in the center.
Progressives, on the other hand, reject the idea that Social Security and Medicare must be radically overhauled to survive, especially when the benefits of the U.S. social safety net are already meager compared with to other developed countries. Both sides of the debate are in the habit of invoking the children of America to argue their points. The Right focuses on the debt we’re leaving them; the Left worries most about the opportunities they’ll have.
During the Eisenhower administration, “we doubled down on domestic investment and created the pillars of the greatest middle-class expansion,” McGhee says. “For me, the part [of the current debate] that is most sickening is the racial, generational aspect of it. When it’s time to do it again, for a young generation whose ancestors were left out of that bargain, the older generation is willing to pull up the ladder?”
The disagreements may seem irresolvable, but the difference between the budget and all the other items on each party’s agenda is that Congress must pass some semblance of a tax-and-spending plan if the government is to continue running. The current debate is complicated by the need to finish an agreement on spending for the rest of this year, and a looming vote to increase the government’s borrowing limit in order to avoid a potential default. With members of Congress openly talking of a government shutdown, it’s hard to avoid looking to the ’90s for inspiration. One lobbyist, a veteran of the Republican negotiating team during the 1997 budget deal that led to balanced budgets, sees some similarities with today’s situation.
“I hope it doesn’t take two years, but it might,” he says. “1995 was the year where they butted heads, shut down the government, couldn’t reach agreement. 1996 was when they started doing some of the things that saved money. That starts to get you on a glide path, and then maybe economic growth kicks in, and then maybe it doesn’t become so daunting. Restrain spending, raise revenues in a smart way, and you generate … 4 and 5 percent economic growth. That is how you grow yourself out of a deficit.”
By the time the 1997 deal was made, the ’96 election had confirmed voters’ support for divided government, giving policymakers more reason to embrace a centrist deal. Today, with political fortunes in flux and each party expecting voters to endorse its approach in 2012, policymakers have little immediate incentive—other than the public good—for agreement on a pro-growth budget. The lobbyist shakes his head ruefully.
“Maybe the next election will be about that.”
This article appears in the Feb. 19, 2011, edition of National Journal.
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