Posted at Americas Quarterly on July 13, 2011
I cannot recall when the issue of raising the United States’ debt ceiling was so contentious. The gridlock has reached fever pitch, despite warnings from economists, financiers and former Treasury officials of the risk the U.S. runs if government intervention is not undertaken. As the world’s strongest economy with the largest reserve currency, a U.S. default would have disastrous consequences on the global financial system.
What is different this time around has a lot to do with how the Republicans have been able to frame the debate around the current deficit numbers (around 9 percent of GDP) and the debt figure now surpassing 90 percent of GDP. As a result, President Obama is locked in a debate about the size and the role of government. The dialogue no longer concerns a balanced budget. Rather, the Republican leadership, under the scrutiny of a vocal and united Tea Party movement, is unable to deliver the kind of compromise solution that could include substantial spending reductions but would also involve new tax revenues.
Looking back on previous battles, we have seen a Republican president like George H.W. Bush raise taxes—at great political cost—to reduce the gap between spending and revenue. A Democratic president like Bill Clinton accepted welfare reform and tax reductions in his effort to streamline government; he left office with balanced and surplus budgets.
In Canada and Québec, the fight for fiscal sanity both in the 1990s and the most recent recession concentrated on careful consideration of the role of government. The mix of two-thirds spending cuts with one-third new revenues, agreed upon in the latest round of debt negotiations, has kept both jurisdictions on course for a balanced budget by 2014. In the process, Canadian lawmakers have not had to encounter an ideological battle about the size and scope of government to the extent that is seen in the U.S.
All sides concede that the current U.S. budget imbalance has much to do with entitlement programs. Both political parties acknowledge this much—to varying degrees—but the differences occur with the solutions. Here, the Republicans are proposing drastic cuts and/or reforms that would greatly modify existing social programs. They argue that no new taxes should be added, making it essentially an effort to reduce the size and role of the U.S. government.
We are far from the era of Reagan, Clinton and the Bushes—where all ideas were on the table.
The Democrats see the problem as a need to reform existing programs, but not put at risk the fundamentals of those programs. Examples of such fundamentals include: universal coverage along with government control of Medicare, Medicaid and Social Security. They also argue that the ballooning deficit occurred principally under George W. Bush’s watch—cutting taxes for the wealthiest Americans (from 39 percent to 36 percent) and executing two unfinanced wars and a drug prescription program which was principally unpaid for.
Democrats concede that the Obama stimulus may have added to the deficit—but that it was needed due to a slow recovery caused by a persistently high unemployment rate. So they propose to end the Bush tax cuts, wind down the wars, cut some defense spending, and do tax reform to raise revenue.
The next few weeks will amplify the current showdown as the August 2 deadline nears. Most serious observers agree that a deal to raise the debt ceiling—thus avoiding default—will be struck soon. What will remain, however, will be the ideological battle about the size and the role of government. To varying degrees, this has been the classic argument over the centuries in this country—and it will likely define the 2012 election cycle. It may still be “the economy, stupid,” but the solutions will have more to do with what kind of government Americans want than with how the economy actually performs.