eu-daimonia.com

Much has been written lately of the decline of the United States.  With pessimism rampant, self-esteem in this bastion of modern civilization is shockingly low.  A recent Rasmussen Reports survey says fewer than one out of five Americans believe their country is heading in the right direction.  At the same time feelings in Canada are very different.  Having waded through much of the economic turmoil of the last few years while neighbours to the south and across the Atlantic floundered, 86% of Canadians now agree with the statement that their country “is the greatest in the world.” Many may be eager to celebrate, but those with a close eye on the economy see daily reminders of the dangers ahead.  Last week, in an attempt to reign in spiraling health care costs, Ottawa fixed spending beyond 2016 to the nominal increase in GDP.  Up next on the federal agenda is the rocketing price of Old Age Security, which is projected to grow 32% between 2010 and 2015 alone.

While Canada dodged the deregulation bullet in 2008 there are two long-term fiscal challenges facing all countries in the West.  Diminishing populations coupled with increasingly expensive public services means fewer citizens to tax when more federal revenue is required.  And a steady increase in international economic competition means Western economies don’t dominate the world as they’ve been accustomed to doing for over 400 years.  The world is now flat, so Western nations must compete while they are outmatched in numbers, resources and political determination.

For more than 30 years now, the consensus in the United States has been that government is the chief impediment to economic activity.  Following this logic, the solution for long-term economic growth is short-term government deterioration.  This thinking resulted in deregulation of financial markets and led directly to “the great recession”, but it poses a subtler and more serious threat of which the consequences are only now becoming apparent.  Federal spending in the United States is categorized as either mandatory or discretionary.  Mandatory spending is written into law whereas discretionary spending is evaluated by Congress annually and much easier to do away with.  In the mid-1970’s the US government started “getting out of the way” of the economy by drastically reducing discretionary spending relative to mandatory.  A gap which was around 1% of GDP in the late 1960s is closer to 10% today.

What is becoming apparent is that the services once provided by these discretionary expenditures are vital to long-term economic interests.  Among them are investments in physical infrastructure, public education services, research and development for science and technologies and programs to help raise citizens from poverty.  Arguments that favoured cutting these programs contend governments provide them inefficiently or they are altogether unnecessary.  Forty years later Americans are paying the price for this foolish shortsightedness.  While their roads and bridges need an estimated $2 trillion in repairs, their children are regularly scoring average at best in international testing.

What is proving to be the ultimate cause of America’s fiscal challenges is the belief that government has little or no role in the economy.  Decades of trading important discretionary spending for short-term fiscal benefits has left their economy void of key inputs such as infrastructure, government funded R&D, and a competitively educated workforce.  Each of these services depends on significant long-term centralized investment because markets undervalue them by nature due to an inherent focus on short-term return on investment.  Governments may not be the model of efficiency when building roads, educating children or inventing things like the internet, but to rob them of the funding to do so is national suicide because no actor in an open market will provide these services at anywhere near the scale required for a nation to be competitive in the modern world.

The ultra-liberalism that has pervaded American politics for decades has left the  country without direction and prone to all the perils of inherent market shortsightedness.  Just as Canadians are riding high on their current economic figures, their government is taking steps to reverse its success by slashing the federal public service by a third.  To balance budgets difficult decisions must be made, but there can be no doubt that the American economy would be stronger today had Americans in the mid-70s chosen to pay more taxes instead of cutting discretionary services.  It was then Americans forgot that governments are the rudders that steer economies.  For Canadians important lessons lie right across the border.  Are we paying attention?