American Politics Divided on Growth Strategy

Parties blame each other for their nation’s downgrade and are unable to find much common ground to help the recovery.

Despite an agreement to raise the nation’s legal debt limit in conjunction with future spending reductions, the major political parties in the United States remain deeply divided over the question how to best stir economic growth. Democrats have suggested more stimulus and tax hikes whereas Republicans insist on austerity. The political gridlock was cited by Standard and Poor’s as a reason for downgrading America’s creditworthiness last week. The two parties have blamed each other for the unprecedented move.

Senator John Kerry of Massachusetts, a former Democratic Party presidential candidate, blamed the downgrade on the Tea Party, a conservative minority in the House of Representatives that pushed for trillions in budget cuts but refused to consider revenue increases. Their intransigence “countered even the will of many Republicans in the United States Senate, who were prepared to do a bigger deal,” he said on NBC’s Meet the Press.

Some of these congressional freshmen, Kerry added, were actually willing to risk a default.

The almost inevitable downgrade of America’s credit rating by Standard and Poor’s also reminded Washington that its current deficit reduction plans fall short of balancing the books in the long term. Kerry recognized that the federal government would have to enact more than $4 trillion in deficit reduction over the next ten years to assure markets. But he also championed additional stimulus spending on infrastructure to save and create jobs.

Although private-sector hiring in July was slightly up, unemployment is still over 9 percent while millions of Americans are only able to find a part-time job.

Republican congressman Paul Ryan of Wisconsin — who chairs the House budget committee and is the architect of the opposition’s plans for fiscal consolidation — rejected another “demand sided” stimulus on Fox News Sunday which he believes could only resuscitate the economy, not hasten its recovery. Instead, he urged entitlement and tax reform to boost America’s competitiveness.

Ryan pointed out that unlike the president’s party, Republicans “passed a budget that would make debt peak in two years at 74.5 percent of GDP” and reduce the debt burden on the economy thereafter. “We put out a plan, very specific plan to address the situation, pay off the debt, balance the budget, reform the tax code to create jobs in the economy,” he added.

Unfortunately, our partners on the other side of the aisle, the president and the Senate, have always been unwilling to put a specific plan out there to address entitlements, specifically health-care entitlements.

By 2021, more than 50 percent of federal spending would have to be allocated to public pension and health support programs, according to the Congressional Budget Office. Along with defense, interest payments on the debt and unemployment insurance, it would be nigh impossible for the federal government to continue to finance other domestic programs unless taxes are raised substantially.

The largest entitlement programs could not be solvent for the next generation unless they are significantly reformed soon. Medicare, which finances health care for the elderly, is expected to run out of money in 2024 while Medicaid, which subsidizes health care for the poor and is paid for through the states, is increasingly crowding out investment in other areas, including education and infrastructure.

The Social Security trust fund is projected to last until 2036 but once it is depleted, the annual payroll taxes that pay for the program will only be sufficient to cover 75 percent of the retirement benefits it is required to pay seniors.

Former Federal Reserve chairman Alan Greenspan previously expressed support for Ryan’s budget plan, noting that with government borrowing over a third of what it spends, to find reductions, lawmakers should look for “not individual, piecemeal cuts or taxes,” but reconsider whole programs instead.

This Sunday, he stressed that the country would not be able to solve its debt problem without pain. “Cutting back on government spending will cause some contraction in economic activity,” he admitted. But tax increases could curtail growth even further.

The old central bankers also warned last year that businesses would not be likely to hire and expand “unless and until we can begin to lift [the] pall of uncertainty.” He reiterated that sentiment on Meet the Press this weekend.

“The evidence is reasonably strong,” Greenspan said, that as a result of new regulations, especially for the financial industry, corporate America is sitting on a pile of cash “in excess of $500 billion in liquid assets held in nonfinancial corporations” that it would invest if it had more confidence. Because it fears more state activism from the incumbent administration though, that capital is not put to work.