WASHINGTON, DC - The painfully negotiated US budget legislation that President Barack Obama signed on August 2 combines an increase in America's government debt ceiling with reductions in federal spending, thus averting the prospect of the first default in the 224-year history of the United States. But the agreement has three major flaws. Two of them offset each other, but the third threatens what America needs most in the coming years: economic growth.
The first flaw is that the spending reductions are badly timed: coming as they do when the US economy is weak, they risk triggering another recession. The measure's second shortcoming, however, is that the spending reductions that it mandates are modest. While the legislation does too little to address America's problem of chronic and rising budget deficits, the damage that it inflicts on the economy in the short term is likely to be limited.
The third and most damaging flaw, however, is that the spending cuts come in the wrong places. Because the Democrats in Congress have an almost religious commitment to preserving, intact, America's principal welfare programmes for senior citizens, Social Security and Medicare, the legislation does not touch either of them. These programmes' costs will rise sharply as the 78-million-strong baby-boom generation - those born between 1946 and 1964 - retires and collects benefits, accounting for the largest increase in government spending and prospective deficits in the years ahead. And, because the Republicans in Congress have an equally strong allergy to raising any taxes, any time, under any circumstances, the bill does not rely at all on tax increases - not even for the wealthiest Americans - for the deficit reduction that it provides.
All of the spending cuts come from the "discretionary" part of the federal budget, which excludes Social Security, Medicare, the Medicaid programme for the poor, and interest on the national debt. That leaves only about one-third of total federal spending from which to cut, and much of that goes to the defence budget, which Republicans will attempt to protect in the future. So the structure established by the August 2 law concentrates deficit reduction on the "discretionary non-defence" part of the federal budget, which is only about 10% of it.
This is too small a pool of money from which to achieve deficit reduction on the scale that the US will need in the years ahead. Worse yet, discretionary non-defence spending includes programmes that are indispensable for economic growth - and economic growth is indispensable for America's future prosperity and global standing.
Growth is, in the first place, the best way to reduce the country's budget deficits. The higher the growth rate, the more revenues the government will collect without raising tax rates; and higher revenues enable smaller deficits.
Moreover, economic growth is necessary to keep the promise - enormously important to individual Americans - that each generation will have the opportunity to become more prosperous than the preceding one, the popular term for which is "the American dream." Just as important for non-Americans, only robust economic growth can ensure that the US sustains its expansive role in the world, which supports the global economy and contributes to stability in Europe, East Asia, and the Middle East.
As Thomas L. Friedman and I explain in our forthcoming book That Used To Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, a crucial factor in America's economic success has been an ongoing public-private partnership, which dates back to the founding of the country, that is imperilled by the pattern of budget cuts established by the August 2 legislation.
That partnership has five components: wider opportunities for education in order to produce a workforce with cutting-edge skills; investment in infrastructure - roads, power plants, and ports - that supports commerce; funds for research and development to expand the frontiers of knowledge in ways that generate new products; an immigration policy that attracts and retains talented people from beyond America's borders; and business regulations strong enough to prevent disasters such as the near-meltdown of the financial system in 2008 but not so stringent as to stifle the risk-taking and innovation that produce growth.
The first three elements of the American formula for growth cost money, and that money is included in the "discretionary non-defence" part of the federal budget now targeted by the debt-ceiling legislation. Cutting these programmes will lower American economic growth in the long term, with negative consequences both at home and abroad. Reducing the deficit by cutting funds for education, infrastructure, and research and development is akin to trying to lose weight by cutting off three fingers. Most of the weight will remain, and one's life prospects will have worsened significantly.
Reducing deficits in order to raise the debt ceiling was the right thing to do, but the August 2 law does it in the wrong way. Unless more deficit reduction, which is inevitable, comes from curbing entitlement benefits and increasing revenues, and less from programmes vital for economic growth, the result will be a poorer, weaker US - and a more uncertain, if not unstable, world.
Michael Mandelbaum is Professor of American Foreign Policy at The Johns Hopkins School of Advanced International Studies, and the co-author, with Thomas L. Friedman, of the forthcoming book That Used To Be Us: How America Fell Behind in the World It Invented and How We Can Come Back.
Copyright: Project Syndicate, 2011. Exclusive to the Sunday Times
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