Behind America’s Budget Debate

One hour before the deadline, the U.S. Congress came to an agreement over the 2011 budget, confirming a $78.5 billion expenditure cut for the 2011 fiscal year and a $38 billion cut in the next six months. The government finally avoided shutting down, the country’s parks and such could be open as usual, and both the Democrats and Republicans said that they obtained satisfactory results.

In reality, neither party has anything satisfactory to speak of; they did nothing more than compromise to resolve a conflict. There will be a presidential election in 2012, and lessons from the recent past still linger. In 1995-1996, when Clinton was president, Congress also faced a situation where Republicans fiercely opposed the budget and the government was forced to shut down. The Democrats pushed the blame on Republicans, claiming that the latter was working for the interests of its own party, not for the nation. As a result, the Republicans, who had had the advantage during the 1996 election, lost to the Democrats. This time, the Republican Party has lingering fears, especially since if it goes over the top, they will leave a bad impression on society and, therefore, lose votes during the election. The Democrats don’t dare drag things on either because they would give the public the impression that they can’t accept a situation where both parties can benefit.

Though Disaster was Averted, It Still Left Three Signs of Danger

The first sign of danger is that the schism within the American Congress is more pronounced than ever and will constantly flare up in regards to a series of issues in the future. This budget debate clearly indicates that the difference between the two parties’ ideologies is too big. Up to the end of March, which marked the end of the first half of the 2011 fiscal year, the budget deficit had already reached $830 billion, an increase of $113 billion year-on-year and an annual rate of $1.66 trillion, increasing 28.3 percent over fiscal year 2010’s deficit of $1.29 trillion, reaching 10.7 percent of GDP, and exacerbating the U.S.’ double-digit deficit situation. Revenues increased $66 billion, yet expenses increased $179 billion.

The Democrats firmly opposed cutting back on anything involving a series of expenses such as medical care, unemployment relief, pension subsidies and home loan subsidies, believing it necessary to guarantee the people basic welfare and maintaining economic stability. To compensate, they advocate expanding financial resources, namely increasing taxes for the wealthy and imposing financial crisis responsibility taxes on banks. Republicans oppose any additional taxes for the wealthy and for large businesses, believing that economic growth depends on private capital, and advocate cutting social spending. We tentatively say that the former reveres the “visible hand,” the latter reveres the “invisible hand,” and that these “two hands” will wrestle non-stop in the future.

The second sign of danger is that, though the American government escaped the first time, it cannot hide forever. The 2012 fiscal year starts in six months, and when the time comes, the budget debate will be even more intense. When the time comes, the elections will be even closer, but the deficit continues to increase. John Boehner, speaker of the U.S. House of Representatives and leader of the Republican Party, says that this agreement sends a signal. That is, it is necessary to more strictly control the deficit, as well as spending. The Republicans’ original platform was to use the remaining six months to cut spending by $61 billion; the Democrats’ platform was $33 billion. The compromise of $38 billion is closer to the Democrats’ price. However, the Republican position is already very clear, and in 2012, the Democrats must make bigger concessions, yet the Democrats’ constituency has decided that it will not cut spending. Therefore, as for what the results of the budget debate coming up in six months will be, we can only wait.

The third sign of danger is that the budget debate forces people to question: Does the quarreling, divided, influenced-by-election-politics Congress have the ability to reduce the deficit and maintain the long-term sustainable growth of the economy? The U.S. budget deficit will again break through 10 percent of GDP, the highest of the major developed economies. U.S. public debt will go over the $14.5 trillion limit in May. Is the economy more important or is the election more important? What answer will the two parties give?

The author is a member of the China-U.S. Economics Association.