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.
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.