With The Elections Now Behind US, What Will The US Do About Serious Fiscal Reform? Obama Did Not Produce Any Clear Plan During The Campaign – Bending The Spending Curve Requires Spending Cuts That The President Promised He Would Fight Against

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By Paolo von Schirach

November 9, 2012

WASHINGTON – President Obama got re-elected in large part because of his reassurance to those who rely more on government programs (low income people, minorities, young voters) that he would take care of them by protecting those programs. He successfully portrayed Mitt Romney and his running mate Paul Ryan, the Republican Party leading fiscal expert, as heartless radicals who would immediately destroy the social safety nets on which millions of Americans depend. The message worked. President Obama got his second mandate, with a decent margin.

Unsustainable debt

But now comes the hard part. There is the immediate issue of the “Fiscal Cliff”, a horrible scenario of draconian and unrealistic mandatory spending tax and tax increases that, if implemented, would cause a recession in 2013.

More broadly –and this is the real issue– there is an unsustainable federal fiscal imbalance (with trillion dollar deficits, year after year) caused mostly, although not exclusively, by the out of control cost of the very social programs President Obama just promised to defend against the insane attacks of the crazy Republicans.

Demonizing the Republicans worked well as a campaign message

Whatever the Democratic Party campaign messages, there is no way that the US fiscal imbalance can be fixed, for good –meaning with a true, long term bending of the spending curve– just by raising taxes on the rich and by some cosmetic budget cuts here and there.

The Democrats successfully demonized Paul Ryan’s plans to radically reform Medicare and Medicaid, the two worst offenders in terms of out of control cost growth. Not at all clear what they would propose as a better, fiscally credible alternative. President Obama carefully avoided getting into any federal spending policy specifics in his bid for re-election.

Avoiding the immediate ”Fiscal Cliff” nightmare is not that difficult. Democrats and Republicans can fudge something between now and the end of 2012. But this would be another instance of “kicking the can down the road”. That is to say, this would provide only a temporary respite.

No road map leading to serious fiscal reform

Warren Buffett, commenting on the out of control European debt crisis several monts ago, famously said that the Europeans could no longer kick the can down the road “simply because there is no road left“. America is not there, yet. It still has some road, therefore some margin; due mostly to good luck.

Indeed, as the country that issues the world major reserve currency, in a context in which bond markets lost confidence in the debt of many EU countries, the US Treasury can still borrow money at ridiculously low interest rates; this way piling up more and more debt without any immediate negative financial consequences. But this debt increase cannot go on forever.

In others words, America is also getting to the end of the road, while the clear winners of this elections –President Obama and the Democrats in the Senate–so far have produced no realistic plan for effective, long term deficit and debt reduction.

Just like Southern Europe?

In the end, it may turn out that Obama won the elections by making spending promises to his base that he cannot keep. Alternatively, by sticking to his campaign pledges to protect unaffordable social programs, the President will hasten America’s trip along the path that leads to a fate similar to Greece, Portugal, Italy, Spain and France. And this is called financial exhaustion and eventually economic decline.

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