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Corriere della Sera, Italy

Big Spenders in the
United States Are a Risk


By Alberto Alesina

The best thing Obama can do to promote growth is to give stability to the tax framework instead, and 'rules' to the financial and other markets. There are no other shortcuts. And here, in fact, is the third path for Obama: Combining his legitimate desires of a relatively generous welfare state with accounting stability. How can it be done? It won't be easy, but we've got the recipe.

Translated By Linda Merlo

8 November 2012

Edited by Lau­rence Bouvard


Italy - Corriere della Sera - Original Article (Italian)

American elections are played out based on the economy: how to get the nation's public finances back on track and what social role the government should have. The U.S. public debt is soaring to around 100 percent of the gross domestic product and isn’t stopping. With no policy change, health care spending, particularly Medicare (free protection for all older people, rich and poor), will grow exponentially; employee retirement systems in many states are already on the brink of bankruptcy. Interest rates can't stay this low forever, rather they will rise; and with debt so high, even modest increases will become boulders for taxpayers. Monetary policy cannot help, having spent its cartridges a while ago. GDP growth is satisfactory, but it won't be sufficient to reduce the ratio to the debt. Obama is faced with three paths. The first is to do little or nothing. Graze the fiscal cliff, but avoid falling over it—that "fiscal cliff" being the fruit of a dangerous combination that will occur at the end of the year when some fiscal cuts will end, and at the same time, some spending cuts will start automatically.

To avoid the trap one must, however, rely on some marginal adjustment; that is, dramatically increase the tax rates for the very rich, but without addressing any of the structural problems of debt dynamics, thus passing the "hot potato" off to the next president.

The second path is to continue increasing public spending to try (probably in vain) to accelerate growth. But keeping away from the "fiscal cliff" would mean a substantial tax increase— and not only for that "famous" one percent of the ultra-rich.

The increases have to be generalized and they're likely to have a recessive and therefore counterproductive effect. The consequences are being felt by some European countries, including our own [Italy]: higher taxes, recession, difficulties making ends meet because the GDP has declined, and with it, so has tax revenue.

This is what Romney was referring to when he said that with Obama, America would wind up just like certain European countries. The expansionary effects of more public spending (providing that there are any) would be a flash in the pan, soon offset by negative effects. That is, there would be more uncertainty about the fiscal future of the U.S., there would be an increase in concerns over the debt and possible interest rate increases, associated with an instability of the increasingly nervous financial markets.

The best thing Obama can do to promote growth is to give stability to the tax framework instead, and "rules" to the financial and other markets. There are no other shortcuts. And here, in fact, is the third path for Obama: Combining his legitimate desires of a relatively generous welfare state with accounting stability. How can it be done? It won't be easy, but we've got the recipe.

Focus social spending on the legitimately needy, and not just with a sprinkling of aid; reform the Medicare time bomb; attack and don't put off the problem of the disastrous public retirement system; finally simplify the Byzantine tax system by eliminating deductions and reliefs in this or that sector just because they're particularly well-represented by some lobby.

There's room, as Romney's economists claimed. Like the Europeans, what we need isn't for an America that follows policies which, in an attempt to pick up a fraction of a point in growth every couple of years, could compromise its fiscal soundness even more. We don't need the U.S. flooding the world with more government bonds, which for the moment are still attractive, but we don't know how long that's going to last.

Instead, we need a prudent America to guide the Western world to an exit from the crisis aftermath with far-sighted policies that don't pass on exorbitant tax costs to future generations. We don't want a spendthrift America financed from abroad.

We hope Obama follows the third path. The Republicans will have the majority in the House, so without bipartisan agreement, the U.S. president won't be able to govern by himself and that's a good thing; only with a solid bipartisan agreement will America emerge from its debt spiral.

I am confident that the two parties will rediscover the path to cooperation. It was a difficult thing to hope for, following such an uncertain and disputed presidential race, but now there's no other way. America has, in the past, been able to get out of situations even more difficult than this, but time is running out, and the abyss is approaching.



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