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America must face up to its
responsibilities, writes Kenneth Rogoff
Many foreign
observers look at the US budget shenanigans with
confusion and dismay, wondering how a country that seems to have it all can
manage its fiscal affairs so chaotically. The root problem is not just a
hugely elevated level of public debt, or a patently unsustainable
trajectory for old age entitlements. It is an electorate deeply divided
over the direction of government, with differences compounded by changing
demographics and sustained sluggish growth. It is hard to escape the notion
that today’s budget battles are but a skirmish in a much longer-term war
that won’t be settled soon.
America must shortly answer a series of fundamental questions. For
example, as its share of global gross domestic product shrinks from about
20 per cent today to as little as 10 per cent in five decades, should it
try to continue to play the role of global policeman? The US spends more
than 4 per cent of GDP a year on defence,
roughly twice the global average. The Obama administration’s fiscal plans
anticipate a peace dividend
after withdrawals from wars in Iraq and Afghanistan. The Republican
party has reasonably argued that it is unrealistic to expect this quiet to
last. At the very least, if military expenditures continue to fall, it
becomes more important to have the fiscal capacity to ramp them up in
response to new threats. It is also worth noting that if the US were ever
forced to surrender the mantle of world policeman to, say, China,
foreigners may no longer have quite the same desire for its debt.
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Another huge area of disagreement surrounds the question of what
services should be provided by the federal government versus the states or
the private sector. There is a lot of “low-hanging fruit” here.
Productivity improvements in government services have been glacial compared
with many other sectors of the economy. A visit to a primary school
classroom in many US cities is the closest thing one can get to time
travel. One idea that economists have been enamoured
with for years is school vouchers but there is strong resistance from
entrenched interests. How long will these same interests forestall online
classes and computer-graded feedback, initially as a supplement for
traditional education structures but eventually as a significant substitute. The fiscal implications are huge, as are the
disagreements.
In contrast, infrastructure should be a place of common ground but
again there is paralysis. Aside from funding priorities, there is a wide
chasm between those who see union domination of infrastructure as key to
ensuring high-paying jobs versus those who want infrastructure built, but
at reasonable rates. There is the joke about the visiting Chinese group
that asks their New York tour guide how long it will take to finish the
Second Avenue subway. On being told two years, the Chinese translator
hesitates before conveying the response and asks: “Wait a second, you mean
two weeks, right?”
One of the US’s greatest assets is its ability to expand immigration
without running into land or resource constraints anytime soon. But US immigration policy
has long been dominated by emotion, not the cold-blooded, rational economic
calculus many other countries apply. There are rigid visa restrictions
aimed at keeping out terrorists, some of which remain incredibly
counterproductive. Immigration policy has large implications for US debt
and the sustainability of entitlements for the indigent population, yet the
link seldom receives serious attention.
And of course, healthcare is the
mother of all fiscal challenges, as costs rise and the population ages.
The idea that one should just ignore all these problems and apply crude
Keynesian stimulus is a dangerous one. It matters a great deal how the
government taxes and spends, not just how much. The US debt level is a
constraint. A growing number of empirical studies, including my own joint
work with Carmen Reinhart, suggest that the US has already reached a
debt level that has been associated with slower growth in advanced
countries. The fact interest rates are low today does not necessarily mean
the US is an exception to this rule – take one look at stagnant Japan’s
rates. The dollar’s reserve currency status buys America more room, but how
much and for how long? A high debt burden is a problem precisely because it
reduces a country’s capacity to deal with future shocks.
The US remains an incredible franchise with many
remarkable strengths. The world’s overwhelming presumption is that
Americans will find a path to budget sustainability. Nevertheless, it is
hard for many in the US to escape the nagging feeling that just maybe this
time we won’t. With more than $5tn of US Treasury debt,
and memories of the huge inflation of the 1970s and default on gold clauses
in the 1930s, foreigners would be right to worry a little.
The writer is professor of economics at Harvard University and the
co-author of ‘This Time Is Different’
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