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Beyond Oratory and Exhortation – Gimmicks and Incrementalism ? Obama’s 2016 Budget : Compromise Or Break Through ?



~ “To ensure America remains a magnet for jobs,the Budget builds on investments in manufacturing and innovation—including through clean energy technology programs and tax policies that position America as a global clean energy leader with a strong and modern energy infrastructure. To fix the Nation’s roads and bridges and create more middle class jobs, it continues the progress toward building a 21st Century infrastructure. The Budget invests in education and job training to give American workers the skills they need to compete in the global economy. It also provides resources to programs that help create opportunity and economic mobility for all, and it reforms the tax system to better support and reward work.“ ~ Pres. Obama’s 2016 Budget.
~ “Some of the most important contributors to human capability may be hard to sell exclusively to one person at a time. This is especially so when we consider the so-called public goods, which people consume together rather than separately. The case for social provisioning arises from the need of basic capabilities such as environmental preservation, elementary health care and basic education.” ~ Amartya Sen, 1999.
~ “States cut higher education funding deeply since the start of the recession. These cuts were in part the result of a revenue collapse caused by the economic downturn. State policymakers relied overwhelmingly on spending cuts to make up for lost revenues. To compensate for lost state funding, public colleges steeply increased tuition and pared back spending, often in ways that may compromise the quality of the education and jeopardize student outcomes. Now is the time to renew investment in higher education to promote college affordability and quality.” ~ Center for Budget and Policy Priorities, 2014.
~ “Numerous past infrastructure investments have been responsible for significant improvements in the overall quality of life in terms of health, safety, economic opportunity, and leisure time and activities. Recent empirical evidence suggests infrastructure expenditures may well have been a key ingredient to the robust performance of the U.S. economy in the “golden age” of the 1950sand 1960s.” ~ David Aschauer, 1990.
~ “The U.S. Highway Trust Fund, a pot of federal cash that covers a quarter of spending by states on infrastructure, will have to start withholding money this summer to keep its balance above zero, as required by law. “The problem with the trust fund,” says David Walker, a former head of the Government Accountability Office, “is that it’s not funded and you can’t trust it.” ~ The Economist, 2014.
~ Those Americans who regard government as the work of the devil forget that Uncle Sam won the Second World War, built a huge inter-state highway system, put a man on the moon, laid the foundations of the Internet, and discovered dozens of life-transforming drugs.” ~ John Micklethwait and Adrian Wooldridge, 2014.
~ “Civilization is the progress toward a society of privacy. The savage’s noble existence is public, ruled by the laws of his tribe. Civilization is the process of setting man free from men.” ~ Ayn Rand, 1947.

As I listened to Pres Obama’s State of the Union address January 20, I wondered how much his soaring and at times visionary oratory would be reflected in a similar expansiveness in his 2016 Budget proposal. After four bruising years of bare knuckle, gridlock-inducing budget warfare with Republicans in the U.S. Congress – who now control both House and Senate – would Obama go for broke and present a budget that matched the challenges he stirringly outlined? Or, would he play it safe, and go for small down payments as a compromise way of moving things forward ?
So I decided only to write about it once we had seen Obama’s 2016 Budget, that came out earlier this month. After all, Budget making is now highly constrained by multiple factors : slow economic growth; stringent sequester caps adopted in 2011 and only moderately revised since; the large and increasing mandatory spending on entitlement programs; increasing interest on debt and reduced tax revenues compared to the 1990s. And, as liberals Micklethwait and Wooldridge note, there has been a rising tide of rejection of “big government” – sharpened by the rise of the Tea Party that wields considerable influence with now majority Republicans. Many of these seem to agree with 1940s American novelist Ayn Rand – once more very much in vogue – that advancing civilization means slashing back government and with it any public shared endeavor.
On the other hand, the depredations of the 2008-09 Great Recession glaringly made clear the gross inadequacies in once great U.S. infrastructure, education and public services. These, as American economist David Aschauer documented many years ago, contributed greatly to U.S. prosperity and growth in the 1950s and 1960s, but much less so since.
Clearly, in today’s political climate in Washington, preparing the 2016 Budget means finding a way to dodge and weave among these powerful conflicting forces.
Key Questions : So, what are the main broad parameters of Pres. Obama’s 2016 Budget submitted to Congress February 2? And how effectively does it factor in the macro-economic outlook for the U.S.A. now and in coming years? How does it follow through on Obama’s grand design (see above quote) of building a “21st. century” economy and infrastructure that enhances opportunity and mobility, share prosperity for all? How does it tackle the now much higher debt and mandatory entitlement programs, including health care? What chance does it have of being approved and succeeding?
Obama’s 2016 Budget in Outline : Pres. Obama’s 2016 Federal Budget proposes total spending of $4 trillion, revenues of $3.5 trillion, and thus a deficit of $474 billion. Spending would be about 12% higher than in 2015 funded mainly by increased revenues. Over two thirds would be for mandatory entitlement programs (Social Security, Medicare, Medicaid,..) and interest on debt. This leaves room for a level of so-called discretionary spending – half for defense, the rest for infrastructure, education, environment and other programs – of $1.1 trillion. This is only 6.2 per cent of the economy (GDP), much lower than the historical average of almost 9%. The deficit would be modest – 2.5% of GDP as is projected economic growth – 2.7% in 2016. However, even these reduced levels of discretionary spending imply a 7% increase over agreed “sequester” caps. Obama is proposing a lifting of these to restore vital programs in education, training and infrastructure and safety net spending that were cut in recent years; as well as a major increase in military spending to $585 billion – or $90 billion over “sequester” cap. On the revenue side, he is proposing to raise taxes on super-wealthy and certain corporations to fund tax breaks – for childcare, education and training – for lower and middle income folks. He proposes reducing the corporate income tax rate to 28% – and to 19% for income repatriated from abroad. This after a temporary 14% tax on major corporations’ accumulated income held abroad to fund an earmarked infrastructure fund of $478 billion over six years to support major reinvestment by the States and local governments.
How It Affects the Overall Economy : While setting up obvious controversies and major divergences with Congressional Republicans – on both spending and revenues – predictably this is a modest budget that will have only a moderate impact on raising U.S. economic growth. As Congressional Budget Office (CBO) projections show, it would lead to sustained modest to slow economic growth – averaging 2.5% – over the coming ten years (2016-2025). As such, it would essentially contain the deficit and the debt and manage mandatory spending programs and defense, at the expense of under-spending on all other discretionary programs, such as infrastructure, education and training, environment and energy. The opportunity to induce higher growth through a major increase in the latter and especially infrastructure – as recently proposed by the International Monetary Fund (IMF) – would be forgone. Because revenue collection is lower than in past times of higher economic growth (like the late 1990s), spending is constrained. Moreover, Obama’s 2016 budget assumes savings due to reforms in immigration and health care that may not be realizable politically or economically. In the international context, it does little to offset the weaknesses in other advanced economies – especially the Eurozone and Japan – and in China.
“Building 21st. Century Infrastructure” : In cogent and compelling terms, President Obama both in his State of the Union address and in his 2016 Budget makes the case for launching vitally necessary reinvestment and new investment in infrastrucuture, education and training. Today, the U.S.A. and American workers face an increasingly competitive, rapidly changing, increasingly digitized and automated international market. As Nobel laureate economist Michael Spence has shown, strong support is needed especially given the backlog in U.S. infrastructure maintenance – estimated at $2 trillion – and cutbacks in education at all levels since the Great Recession of 2009.
However, the Center for Budget and Policy Priorities (CBPP) – see above quote – estimates 46 out of 50 states cut higher education funding 10-40% in 2008-14. As a result, college tuition has soared 10-80%, and college enrolment plummeted by 1 million in 2011-14. While some States have partially restored funding, spendig is far below pre-recession levels – as it is also for K-12 education. The USA scores well on college graduation rate by international standards : it is in the top ten but has not improved college enrolment as a share of population in thirty years – as the OECD noted in 2014.
Meanwhile, in infrastructure, many bridges, roads, ports, airports need massive reinvestment – as The Economist noted in 2014 – see above quote. However, State and local spending on this plummeted by one-third to only $250bn. nationwide in 2013 — under budget constraints after the 2009 recession.
Faced with these towering reinvestment needs to truly “build a 21st century infrastructure” and education, the Federal Government’s budget – as explained above – is too highly constrained adequately meet them. In his 2016 Budget, therefore, Obama is proposing a wide range of generally low cost partial programs aimed at partnering with the States. However, many States – often led by Republican governors – are – as in Wisconsin and Louisiana – preferring to cut taxes and spending, including for higher education.
On education, Obama proposes launching or expanding some very important, but partial, initiatives in such areas as pre-school, restoring Head Start, education tax credits, and, perhaps most imortantly tuition-free community college for all who qualify. On infrastructure, meanwhile, Obama is proposing creating an infrastructure reinvestment fund by channeling earmarked corporate income tax revenues (see above) over six years (2016-21). Since the USA has until now not employed public-private partnerships widely in infrastructure for many decades now, sensibly Obama is proposing creation of a national infrastructure bank to support State and local initiatives in this area – also creation of tax-exempt bonds authority. In addition, his 2016 budget proposes modest expansion of matching funding for public transit initiatives.
However, while these are all worthy efforts – although probably too thinly spread over too many small programs, they would clearly fall far short of meeting the massive needs to reinvigorate the USA economy in the coming decade.
Obama as “Artful Dodger” and Tactical Proposer : Faced with a political and fiscal context so constrained he cannot hope to help fully address the major public good investment needs of the US economy, Pres. Obama has opted, it would seem, to play “artful dodger” and tactical proposer. He has used his 2016 Budget to lay out the priorities and economic challenges for the coming decade, in a climate where, at least for now, neither the Federal nor the States and local governments have the funds, the political will or the inclination to fully or adequately address them. His budget at best opens the debate – a vitally necessary one. However, too many of the programs proposed are too small, whereas others appear overly interventionist in areas perhaps better left to private initiative (manufacturing institutes, for example). Obama’s tax reform proposals are very limited and go nowhere near addressing the thorough overhaul the US tax system so clearly needs.
Conclusions :In sum, Pres. Obama’s 2016 Budget, while it lays out compellingly some of the most important issues facing the USA today, is essentially a small bore, incrementalist program. It would appear aimed more at eventually reaching some agreement with Republicans so that some moderate level of public investment can be achieved in today’s highly charged and constrained political context. As such, it is far from addressing our nation’s challenges and needs. It is to be hoped that our political leaders – at both the Federal, State and local levels – will quickly come around and rise to meet these. I, for one, earnestly hope so. The stakes for the long term future are all too high.



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