U.S. President Barack Obama and his Republican challenger, Mitt Romney, are under fire from critics who charge that, while they energize their political bases and fight for key votes in swing states late in the election campaign, they’re providing scant details about how to reduce strangling U.S. deficits. The shortfalls have exceeded $1-trillion for each of the past four years, resulting in a national debt of more than $16.1 trillion.
"They’re both really playing a populist card. Obama is playing a populist card on the left and Romney is playing a populist card on the right. What’s missing is a kind of common-sense card," lamented Glen Hodgson, senior vice-president and chief economist of the Conference Board of Canada in Ottawa.
Experts also stress the current situation has the world’s largest economy peering over the edge of an abyss dubbed the "fiscal cliff" heading into 2013, and perhaps teetering on the brink of long-term instability.
"Neither has really put forward kind of a three- to five-year plan to get back to a balanced budget. The can is being kicked down the road yet again," charged Hodgson. "It is arguably the biggest issue facing the U.S. economy."
The candidates should level with voters and tell them the U.S. is borrowing so much money every year it’s about to lose its coveted triple-A credit rating yet again, Hodgson stressed. He noted Standard & Poor’s already drove the U.S. rating down to double-A in 2011; Moody’s recently threatened to follow suit if concrete steps aren’t taken to tame the deficit early in the new administration.
"Both seem to be well short of the mark doing anything to cure the very difficult debt and deficit problem we have here," agreed Bill Frenzel, a guest scholar at the Brookings Institution, a private, non-profit public policy research organization in Washington, D.C.
Key Obama proposals include terminating the Bush-era tax cuts for families making over $250,000 annually and for individuals earning in excess of $200,000, and cutting the top corporate tax rate to 28 per cent from 35 per cent.
Through a combination of tax increases on high income earners and closing corporate loopholes, Obama projects $1.91-trillion will be added to the U.S. treasury over the next 10 years.
On the other side of the ledger, Obama proposes $1.78-trillion in spending cuts over the next 10 years. He also intends to save $850-billion from returning overseas military personnel, and $320-billion from Medicare and Medicaid through a combination of reduced payments to health care providers and higher premiums and lower deductibles for more affluent beneficiaries.
Romney proposes a broad 20-per-cent marginal personal tax rate cut across the board, and eliminating taxes on interest, dividends and capital gains for those with less than $200,000 of adjusted gross income. Romney would cut the top corporate tax rate to 25 per cent and would overhaul the tax code to close various loopholes, in addition to eliminating the death tax, and repealing the alternative minimum tax.
On the spending side, Romney proposes to cap annual spending at 20 per cent of GDP; repeal the Obama health care plan, with estimated savings of $95-billion annually; privatize Amtrak, for savings of $1.6-billion; and reduce the federal workforce by 10 per cent through attrition to save another $4-billion, among other cuts.
Romney also proposes to balance the budget within eight to 10 years, but that has attracted scepticism, particularly when the cost of a 20-per-cent tax cut is combined with his proposal for increased military spending, which some observers claim could add another $7.3 trillion to the budget over 10 years.
Frenzel, who served in the U.S. House of Representatives as a Republican congressman from Minnesota between 1971 and 1991, was critical of both platforms.
"Whatever [Obama] has been planning up to now is grossly inadequate to take on the debt problem. He has expanded on what he calls investments to improve the economy, which, to me, are simply additional expenses which may have some effect on the economy, but certainly will have a deleterious effect on the budget," Frenzel predicted.
"Mr. Romney, on the other hand, has not given us much indication of what he can do. He says he wants to balance the budget, and that’s a nice pious statement. But he looks like he intends to spend more money on defence than Obama."
Mary Webb, a senior economist at Bank of Nova Scotia in Toronto, believes Obama and Romney have provided specific details about their proposed changes to personal and corporate income tax rates. Where vagueness exists, she said, is in providing details about how they’re going to scale back the income tax expenditures required to trim the general corporate income tax rate and extend specific tax relief, such as some or all of the Bush tax cuts, while simultaneously scaling back the budget deficit.
"Decisions on which corporate and personal income tax expenditures to cut and by how much will be controversial, so that is where some of the vagueness occurs. For example, it will not be easy to re-assess tax expenditures such as mortgage interest deductibility. It’s not so much [about] the rates per se, but on how you’re adjusting all the other parts of the system that result in your effective rates," she explained.
Hard decisions need to be made that can’t be solved simply by tinkering at the edges, experts emphasize.
Medicare and Medicaid represent the biggest fiscal problems in the U.S., according to Sergio Rebelo, a professor of international finance at the Kellogg School of Management at Northwestern University in Evanston, Ill. "The expenditure associated with these programs is rising rapidly with the aging of the population and increase in the cost of health care. This is a problem that cannot be solved just by cutting discretionary spending or making the government more efficient."
Only 20 per cent of the U.S. budget involves discretionary spending. Another 20 per cent is defence spending and 60 per cent of the budget pays for non-discretionary spending — things like social security, Medicare, Medicaid, unemployment compensation, and other programs, he added.
Many experts stress the U.S. needs to hit the ground running with a concrete plan to reduce the deficit after the election season is over. If, for example, Moody’s were to lower the U.S. credit rating from triple-A, or Standard & Poor’s were to lower the existing double-A rating, the result will be a higher cost of borrowing funds, which also adds to the costs of servicing the deficit, thus perpetuating the problem, they note.
That could also negatively influence interest rates. "Our interest rates have [still managed to] go down rather than up, and I guess that’s partly because we had a reasonably functioning economy. But eventually our interest rates will have to go up as a result of our philandering," cautioned Frenzel.
Another elephant in the room is that a complex series of revenue increases and expenditure reductions dubbed the "fiscal cliff" are scheduled to take effect on Jan. 1, including:
• Elimination of the Bush-era tax cuts;
• Elimination of the Obama-era temporary payroll tax cuts;
• Imposition of new taxes from the present administration’s new health care law;
• Various across-the-board spending cuts totalling $1.2 trillion over 10 years.
The latter were triggered when a Joint Select Committee of six Democrat and six Republican House and Senate members failed to compromise on a package of tax increases and expenditure reductions in 2011.
Many are calling for Congress to legislate changes so the U.S. doesn’t have to bear the full impact of the fiscal cliff, fearing the short-term effect all these measures will have at once on a still-fragile economy.
"Unless Congress acts, we will see $500-billion of tax increases and $100-billion of spending cuts in 2013," said Rebelo, who predicted that such measures, unaltered, could drag the 2013 U.S. GDP down from a projected growth of 2.5 per cent to a contraction of 1.3 per cent.
Frenzel also fears the consequences if Congress doesn’t intervene. "I think we have to stagger whatever we do with taxes and whatever we do in spending so they take effect over the next several years, but not all in one lump, so we don’t shipwreck the economy," he cautioned.
Hodgson said that if the U.S. continues on without meaningful cuts to the deficit, Canada is clearly in the front line. "It’s really disappointing as a Canadian watching this."
"We can suffer from shock therapy yet again where the Americans need to get their act together and it ripples through our economy. We’re already seeing firms trying to cope with the strong dollar … going through adjustment right now. The likely outcome would be an even stronger Canadian dollar making the adjustment shock that much more acute for our economy.
"I would really like to see that be a signal for Canada that we have to redouble our efforts to think about the growth impetus within our own economy. We’re chasing trade with Asia, for example, to diversify trade away from the Americans, to start finding other poles of growth in the world economy," Hodgson said.
Meanwhile, south of the border, "I think the one hope for salvation here after the parties get out of whacking each other in the elections, is they are able to sit down and do the work. That’s our hope," Frenzel said.
"We should have emulated the good work done by our neighbours to the north several years back [in tackling the deficit], but we’re a little slower to react."