Early next month, Americans will decide whether to re-elect Democrat Barack Obama as President or vote in Republican Mitt Romney instead. Reports of America’s decline have been greatly exaggerated—it remains the world’s most powerful nation, although it does run the risk of being eclipsed by China in a couple of decades. With the global economy still struggling and tensions in the Middle East still high, a presidential election in the US is bound to have far-reaching consequences beyond American shores. A Romney victory will be better for economic growth in America and will weaken the renewed global allure of interventionist or authoritarian state capitalism that is more likely to end up in crony, rather than competitive, markets.
The Democrats constitute the centre-left coalition, and the Republicans are on the centre-right. While the Indian political landscape is not as easy to categorize, we have nonetheless been governed by centre-left politicians who wasted most of the tax bonanza of the last decade (and then some) by buying votes through unproductive government schemes and brazenly indulged in corruption on an unprecedented scale.
Indians need to understand what is at stake here. In the last decade and especially after the global financial crisis, America has been losing out to smaller, nimbler economies in Asia (and even Scandinavia) in economic freedom rankings. Liberalization of skilled immigration is held hostage by the political stalemate over the legalization of illegal immigrants who are mostly from South and Central America. Barack Obama sees himself continuing the work of Franklin Roosevelt in the 1930s and Lyndon Johnson in the 1960s, and has been expanding America’s centralized welfare state and creating what he sees as a more compassionate country—a country that he thinks unfairly rewarded the wealthy through the Reagan Revolution in the Republican party.
Importantly, Obama and his congressional allies do not see themselves, despite rhetorical commitments, as followers of Bill Clinton or Tony Blair—prophets of the New Left that politically reconciled (in the booming 1990s) supply-side economics, privatization and lower taxes with a defensive, better-targeted consolidation of the welfare safety net. Barack Obama sees himself as the anti-Reagan, anti-Thatcher social democratic revolutionary. A second term to Barack Obama (who, because of term limits, cannot run for a third term, and hence would be more concerned about his legacy than day-to-day polls) would embolden him somewhat similarly in the way the Congress-United Progressive Alliance’s victory in May 2009 emboldened the National Advisory Council, Congress president Sonia Gandhi’s kitchen cabinet, which is really the driving force behind policy decisions and whose mantra could well be: “We believe in limitless spending and redistribution to deliver ‘inclusive growth’.” It’s the kind of growth that seeks to make all citizens equally poor and subservient to the state.
Obama’s signature achievement, for example, is what is now known as “Obamacare”, an expansion of healthcare subsidies to the American lower middle class (the poor and the old were already covered). Taxes and borrowings will pay for this new entitlement as it kicks in, but a part of projected savings will come through a board of unelected bureaucrats who will ration care. In doing this, America will finally follow Britain and Canada by promising care to all but de facto prioritizing it through long queues. On the other hand, certain countries such as Chile—in the case of pension accounts—and Singapore—for healthcare—have implemented policies similar to Milton Friedman’s school vouchers idea that foster choice and competition. Scandinavian countries have also managed to separate the normative imperative of redistribution from the government-only mechanism of doing so. India itself has gotten one of its few welfare programme design success stories in the area of public health—the Rashtriya Swasthya Bima Yojana is more of a PPP (public private partnership) scheme rather than a top-down government-driven model employing unionized workers, although it can be further improved.
With the American Supreme Court partially upholding the constitutional validity of Obamacare, its future now depends on who gets elected. An Obama victory will entrench this statist approach and slow medical innovation globally. A Romney victory is likely to see Obamacare being gradually replaced by “premium support” or insurance vouchers. Both will have to contain costs—vouchers will do so transparently through competition, and an unelected group of bureaucrats (Independent Payment Advisory Board, or IPAB, in the US, and National Institute for Health and Clinical Excellence, or NICE, in the UK) through hidden rationing. Equally importantly, a Republican victory will likely see higher support for private, parochial and charter schools, in stark contrast to India’s continuing nationalization of education.
It is important to understand that, increasingly, American welfare policy and fiscal policy are converging because the biggest driver of long-term federal spending is social entitlements—especially on healthcare. While the pensions programme can be tweaked with a few cuts for rich seniors and a gradual increase in eligible age, the healthcare programme is the big unknown variable. The present value of healthcare promises or liabilities, by some estimates, is at least four times (north of $60 trillion) the entire gross debt of the US government. Any cuts in defence or discretionary domestic spending ultimately pale in front of the welfare state juggernaut.
But fiscal policy is not just about spending—taxes constitute the other side. Here, it is important to understand that it is not just the ideology that one professes about the ideal social contract between people (through the instrument of the state) that is important, but also the inescapable reality of tax competition. As meticulously documented in Chris Edwards and Daniel Mitchell’s book Global Tax Revolution and elsewhere, the US has one of the highest corporate tax rates in the world now. Moreover, it is one of the few countries that has a global taxation system, instead of a territorial one (resulting in an increasing number of patriotic Americans abroad deciding to keep the flag, but saying “no, thank you” to the passport). The Republicans are proposing lower rates and a broader base—in line with the bipartisan compromise of 1986. This is an idea that should be adopted by all countries.
Lastly, even monetary policy has now become an extension of fiscal policy with never-ending large-scale asset purchases by central banks that are already raising inflation expectations, if not the current inflation number. Mitt Romney is likely to appoint a different Federal Reserve chairman—one who will almost certainly be more hawkish than present Fed chairman Ben Bernanke. Commodity markets will likely go down, but the equity markets may be hurt less if structural reforms are pushed through. This would be beneficial for countries such as India which run a big trade deficit, primarily due to oil imports. Yes, Republicans seem to have mindlessly opposed more financial regulations, especially the Volcker rule, but the current Dodd-Frank law is extremely messy and needs reform. Overall, despite Bush’s deficits (which Obama inherited and expanded), the Republicans are likely to be good for economic growth. The Democrats are likely to push for higher tax rates and spending, which will further stifle the economy.