Monday, 3 August 2009

Long Road to Solvency

Timothy Geithner is right - America faces tough choices when it comes to dealing with her treble deficits. She must deal with them, or face being unable to deal with future massive economic shocks.

The federal budget deficit - currently running at more tan US$1 trillion a year - is feeding a growing slew of debt, currently worth over US$11.6 trillion. This debt needs to be cut far and fast in order to restore to the federal government freedom of action, and greater financial security to America as a whole. At the moment, the United States borrows 14 cents out of every dollar it spends, and the vast majority of what it spends goes on its' massive military commitments.

But the axe must fall, and where must it fall? There are some obvious ways to help trim the deficit, with minimal pain (arguably). A reformed procurement process, designed to break the iron triangles between Congress, the bureaucracy and special interests - especially in the area of defence - should help drive down the cost of contracts. As the war in Iraq winds down, then expenditure there should, ideally shrink - though this is likely to countered by rising costs emanating from a tougher fight in Afghanistan.

Big defence budget cuts, though, are both unpalatable and dangerous. The United States is not only effectively responsible for the security of large tracts of the world - including Taiwan, bolstering Europe against potential Russian threats, the Gulf States, Israel and South Korea - but the defence budget flows mainly into US companies, keeping factories open and skilled labour occupied. Neglecting the defence system would damage both these systems - but reform is essential, to encourage defence companies to be trimmer and quicker, and to help balance the budget up.

Elsewhere, though, there are big targets that need to be slashed back. The US spends $8 billion plus a year on agricultral subsidies. These go mostly to big commercial farmers, and benefit a bloated agricultural industrial sector before they help any small farmers. A massively cut, reformed farm bill system would help control spending and relieve rural poverty, whilst recognising the shrinking role that agriculture plays in the US economy. It would also help secure future free trade deals, strengthening the US economy further by deepening her trade ties.

The US's many agencies and departments can also be cut back, to help trim the federal bureaucracy. The many intelligence agenices represent a clear example of this - victims of neverending turf wars, divided and argumentative. There are at least 16 intelligence agenices in the US, with overlapping compotencies. Is it necessary to have all these agencies, with all the bureaucratic overlap that it entails? As the budgets are classified, we do not know how much could be saved, but surely a significant portion of the US$45 billion believed to be spent on intelligence every year can be clawed back through simple efficiency measures.

Healthcare reform can also deliver lower costs on programmes such as Medicare and Medicaid. The system needs to work towards emphasising 'better care' not merely 'more care', and this can be achieved through better seperation of the medical industry - big pharma, tool supplies and so on - from doctors and nurses, enabling them to use medical judgement before commercial pressure. With procurement reform, health costs can be brought back towards the OECD average, not at 15% of GDP, which represents a significant drain on US economic capacity. Government need not run healthcare - it need merely ensure that the special interests, bureaucracy and Congress are kept at arms length, and that a better ethos is allowed to govern how money is spent.

Taxes need to go up, as well. The Bush tax cuts were unpaid for with equivalent spending cuts, and they need to be rolled back. There is no point keeping them, if all they do is put pressure on the finances. They did not avert the current recession, and the data shows that strong economies can flourish with higher tax rates than the US. This is not a call for endless tax hikes - but it is a call for the end to a vast array of tax benefits, deductions and cuts. The end to breaks for constructing airports, for example, would not only ensure more revenue, but would work to help move commuters to less polluting forms of transport, preserve more green spaces and distance special interests. The US tax code can surely be trimmed down, made easier to read and easier to enforce. Thus, tax revenue can be more cheaply collected, and it will cost business less to fill out the forms. The notion of a VAT for the US should also be considered, but not before reform of the current tax system has been thoroughly considered.

These proposals only scratch the surface. But they are the kind of thing that the Obama Administration must seriously consider if it is to rein in the deficit and help restore America's financial position before the Baby Boomers retire.

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