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“Cut and Invest” vs. Austerity

By / 4.19.2013

President Obama’s new budget attempts to define a progressive alternative to conservative demands for a politics of austerity. Having just returned from a gathering of center-left parties in Copenhagen, I can report that European progressives are wrestling with the same challenge, and are reaching similar conclusions.

There was wide agreement that the wrong answer is to revert to “borrow and spend” policies that have mired transatlantic economies in debt, while failing to stimulate sustained economic growth. The right answer is a “cut and invest” approach that shifts spending from programs that support consumption now to investments that will make our workers and companies more productive and competitive down the road.

“You can only have a Nordic model if you’re competitive,” declared conference host Helle Thorning-Schmidt, prime minister of Denmark. “In this country, we cannot tax more; it’s that simple,” she added. “If you like the welfare state, if you want to sustain it, you have to take the tough decisions.”

The United States, of course, spends a lot less than Europe on income transfers and social subsidies, and our comparatively lighter tax burdens means there’s still room to raise revenues. Obama’s budget asks wealthy taxpayers to pony up $580 billion in revenues over the next decade, all of it for deficit reduction. On the spending side, the budget takes the first, halting steps toward a “cut and invest” approach, but falls short of the all-in commitment required to hoist our economy out of its slow-growth rut.

Giving priority to jobs and growth, Obama calls for new investments to replenish America’s depleted stocks of physical, human and knowledge capital – aka, infrastructure, education and job training, and science and technology. To get America moving again—literally—his plan proposes $40 billion to repair highways, transit systems and airports, and, for the umpteenth time, a National Infrastructure Bank. Nonetheless, the Bank is especially critical, for two reasons. First, it would use public dollars to leverage private investments in modernizing our transportation, energy and water systems. At a time of constrained federal budgets, it’s essential to tap private capital—pension funds, institutional and even foreign investors—in rebuilding the economy’s foundations. Second, the Bank would recruit a corps of finance professionals to steer investments into projects that generate real economic returns, giving citizens more confidence that politicians won’t waste their tax dollars on pork-barrel spending.

In addition, the budget would create new bonds to finance big capital projects, invest in high-speed rail, modernize air traffic control system (boosting efficiency and reducing those interminable airport delays) and speed up permitting for major infrastructure projects. The Obama plan also would invest more in early education for poor children and in equipping Americans with the world-class skills they need to claim their share of the world’s high-wage jobs. And it would build on America’s comparative advantage in innovation and technology by upping spending on research and development, and establishing regional centers to promote advanced manufacturing.

Obama would pay for these investments by trimming $800 billion from entitlement programs and claiming savings from a “peace dividend” as U.S. troops come home from overseas wars. The former cuts are too modest, and the latter go too far.

The budget, for example, projects that U.S. defense spending will fall from 4 percent of GDP to 2.4 percent by 2013. This seems improbable, given that defense spending hasn’t dipped below 3 percent since before World War II. Nor does it seem prudent, considering the continuing threat we face from Islamist terrorism, endemic violence and instability in the Middle East, and rising tensions in the Far East.

The president’s proposal to slow down the cost growth of Medicare and Social Security is hardly draconian, but it’s triggered a furious reaction from self-appointed political commissars to his left. Jim Dean of Democracy for America is even threatening to “primary” Democrats who dare to back Obama on entitlement reform.

This is just the kind of ideological rigidity that has put the Republicans in the voters’ dog house. As the baby boomers surge into retirement, the automatic growth of entitlement spending is squeezing out domestic spending, now just 14 percent of the federal budget and falling. That means dwindling public investments in educating our children, building a world-class infrastructure, expanding the frontiers of science and discovery, protecting the environment, and other progressive priorities.

As Bill Galston of the Brookings Institution points out, under Obama’s budget, Medicare and Social Security spending would continue to expand as a share of GDP, while domestic spending would fall by one third, from 3.7 to 2.5 percent.

If America is to get back on a high-growth path, these trends must be reversed. We need to cut spending on consumption so that we can invest more in economic innovation, production and competitiveness. Only in this way can U.S. and European progressives build economies big enough to support their social aspirations.