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Political Gridlock + deficit doesn’t bode well for social spending

Political gridlock, especially with parties splitting control of Congress, the inclusion of the Tea Party, and the current political climate, doesn’t bode well for poor and vulnerable US residents. Social safety nets could be threatened; there will be political attempts to bleed healthcare reform; and many Americans want to cut many social spending programs that benefit the poor and vulnerable, especially foreign aid.

Gregory F Treverton writes,

“While extending federal jobless benefits passed both houses in July 2010, it did so only with token Republican support. And the beneficiaries of that extension included many middle-class people for whom long-term unemployment was new.

On healthcare, gridlock means that no effort to roll back the reform entirely could pass, much less escape a presidential veto. Republicans are likely to chip away at the reform by, for instance, trying to deny funding to administer the program or by withholding funding for the Internal Revenue Service to enforce the reform‟s centerpiece – the requirement that employers offer health insurance or pay a penalty.”

With the Tea Party and Republicans calling for spending cutbacks and deficit reduction, many social programs both abroad and domestic will be put in the crosshairs.

“On the spending side of the ledger, defense is a juicy target – for it accounts for more than half of all discretionary (that is, non-entitlement) spending – but not, by poll results, an especially tempting one. Defense surely will not be entirely spared. By the poll results, the main victims of budget cutting would be foreign recipients of U.S. assistance. In fact, of course, however much foreign aid is cut, it would not have much effect on the fiscal situation, for that aid is not a large fraction of the budget. (Indeed, one reason for the poll results, and many others like it, is that Americans think their country spends a lot more on foreign aid than it does.) Yet other items of special interest to the poor and vulnerable are among the more tempting cuts – housing, mass transit and aid to the poor. The less tempting targets of cuts are those entitlements that benefit the middle class, especially Medicare, but also Social Security.”

Implications

One way or the other, the nation is going to have to put its fiscal house in order. Driven by the recession, private savings has already increased. Yet private savings risk being offset by government deficit spending. There really are only three ways to fix that imbalance: (a) cut spending, (b) raise taxes, or (c) devalue the dollar. The third is unpredictable and unlikely. The only question about the fiscal rebalancing is whether it will be “soft,” meaning that the government takes the process into its own hands and manages it, or “hard,” in the sense that gridlock results in inaction and the process is driven by markets and foreign holders of U.S. debt.

Also salient is the negative American reaction to foreign aid spending. Given that it’s not a major part of the budget, it’s unlikely to radically change, but it could pop up in many campaign messages, especially from the Tea Party, with the potential to send negative signals internationally about the US commitment to foreign aid.

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Sources:

RAND, Oct 2010, page 9-11: http://newsletters.clearsignals.org/RAND_Oct2010.pdf#page=9

C. Fred Bergsten, “The Dollar and the Deficits: How Washington Can Prevent the Next Crisis,” Foreign Affairs, Vol. 88, No. 6, November/December 2009, pp. 20–38.


Annie Lowrey, “The Futility of Budget Cuts,” The Washington Independent,
April 8, 2010, available at http://washingtonindependent.com/8164;the-futility-of-budgetcuts.

Robert Pear, “Short of Repeal, G.O.P. Will Chip at Health Law,” New York Times, September 21, 2010, A1, available at http://www.nytimes.com/2010/09/21/health/policy/21repeal.html?_r=1&th&emc=th.