The government shutdown continues in the US and worries are growing about the looming debt-ceiling deadline, and if the US will default. The media discussions are occurring around the clock about the evolving positions of the Republican and Democratic parties. However, so far they do not appear to be much different from what they were earlier, leaving little room for compromise.
The question remains, why did the shutdown occur and was it really about the Republican resistance to Affordable Care Act (Obamacare) that brought about this fate. President Obama himself has stated the closure is political in nature and a response to his health care plan, and not about some ideological differences or spending issues. The comments emanating from the Republican side seem to verify this; they claim if Democrats agree to defund the Obamacare program, the budget will pass and the government will open.
A deeper look reveals a different picture. The confrontation between the Democratic and Republican Party is related to a wider debate on the role of government and the private sector in governance. The US is presently in the midst of a fundamental transformation, and the seemingly day-to-day maneuvering is part of a larger debate about contemplating its role in an era of fiscal restraint, locally and globally. A historical perspective is needed to understand how the US arrived at this stage and the associated political, economic and security reasons behind it.
The Differing Outlook of Republicans and Democrats
At the root of this present fiasco is Republican belief in small government, less regulation, and letting the market forces (laissez-faire) determine the direction. The party has traditionally supported lower taxes (capital gains tax) for the rich, as it believes it suffocates further investments. On the other hand, the Republicans, also known as Conservatives, have always been critical of the Democrats that have supported social programs, believing that it’s the government’s responsibility to play a balancing act. Moreover, the Democrats, also known as Liberals, want to tax the rich more and have imposed more regulations on corporations.
How these differing views have played out in the present American drama is obvious, but polarization has been made acute by the on-going recession and the debt crisis. The simple way to understand the debt ceiling debate is that government revenues are lower than the expenditures, which means the US government has to borrow money to settle the difference. As the gap between the income and spending grows, so does the deficit, which stands at about $16.7 trillion.
Added to the complication is the fact that as a result of the economic recession, the tax revenue has reduced while the government had to spend even more on assistance and bailout packages for the banks, due to the collapse of the housing and financial sector. Another factor related to the tremendous increase in expenditures has to do with the security environment prevailing since 9/11, which led US in to Afghanistan and Iraq.
The dilemma Pakistan faces is somewhat similar, at a smaller scale. Its economy is shrinking and thus the country has to borrow money from institutions such as the IMF to cover the deficit, and to make the interest payments on loans taken in the past. However, when the country tries to raise taxes or decrease subsidies, it faces a public backlash from the middle and lower class. At the same time, the country has been unable to address heavy spending in defense and waist in the forms of corruption. However, the issue in Pakistan is not related to the differing views of various political parties, as it is in the US. Larger parties that form the government, behave pretty much the same way once in power, and have protected the interests of the elites.
While US has had about 17 shut downs in the past, the last one being in 1995, the present one indicates the country may actually may be in the midst of a course correction. At the end of the Great Depression, US entered an era what came to be known as the Great Deal, starting from 1933. Democratic President Franklin D. Roosevelt greatly expanded the role of government and social welfare programs.
One of the goals of his first hundred days was to deal with financial mess and the banking collapse. The Federal Deposit Insurance Corporation (FDIC) that guaranteed bank deposits was established during this time including many other regulatory agencies. Social Security Act came in 1935, including the right for workers to bargain collectively, the labor unions. It was during this time the influence of British economist John Maynard Keynes was expanding. He argued to deal with the depression government should reduce interest rates and taxes while increasing expenditure, and not worry about balancing the budget. This, he claimed, would result in growing investments and consumption.
While many other economic concepts have been applied ever since, the Keynesian approach remained influential. Another major concept, for example, came in the form of Reaganomics. The Republican President, and economist Paul Harvey, argued in the 80s that to stimulate the economy, government spending, income and capital gains tax, including government regulations, need to be reduced, and to manage the supply of money to check inflation.
Theoretically speaking, the fix to the situation US confronts is to increase revenues by raising taxes, eliminating waste and duplication, while cutting and reforming programs that are no longer needed or affordable. The challenge is the two parties interpret what to cut and what to retain differently, based on their ideological outlook. The Conservatives want to cut and reform social welfare programs that have come to be accepted as entitlements. The other part of the equation has to do with the defense spending already impacted by the sequestration.
While the New Deal had greatly expanded the role of government and social programs, Republicans have consistently fought to cut it down. While these struggles have continued in the past, they have taken on a new dimension in the era of economic recession and when security concerns have taken precedence over economic matters since 9/11. As the debate continues, US will have to frequently study its history to reinterpret and make the intent of the founding fathers relevant.