During the American presidential campaign, voters seemed to be demanding a Franklin D Roosevelt. What they want from after today’s mid-term elections appears closer to a Ronald Reagan.
Both presidents enacted simple, comprehensible policies to repair America’s economy in the wake of severe recessions. Both played the key role in winning two global conflicts or semi-conflicts – the Second World War and the Cold War respectively.
On the economy, Roosevelt was left-wing by American standards, increasing government spending, boosting the welfare state and enacting straightforward banking regulation.
But Obama’s attempts to imitate Roosevelt have met with opposition from the American public, which has become concerned at ballooning healthcare and government spending and the complexity of the watered-down financial reform package.
What the American public seem to want is a straightforward Reaganite programme focusing on security, cuts to taxes and benefits and restraint in public spending.
A contemporary Reaganite agenda might look something like this. (article continues below)
First, America has reasonable control over national security, arguably unlike at the height of the Cold War. Americans have been planning their exit from Iraq and Afghanistan and have prevented a repeat of 9/11 in their own country.
On an international level, Iran is a threat, and Pakistan is in difficulties, but they do not have a nuclear arsenal on a Soviet scale.
The most pressing Reaganite security question is financial – “it’s the economy, stupid,” to quote from Bill Clinton’s 1992 campaign.
America has yet to cut down its too-big-to-fail institutions, which are too ungovernable and too great a liability for the economy to bear. It has yet to reform state finances, which in some cases are out of control.
In the absence of a functional Congress, it also relies excessively on the Federal Reserve to stimulate the economy, which forces the Fed into problematic policies such as the upcoming round of quantitative easing.
To take an example, the Fed can only influence the supply of money, not whether that money is spent on jobs. Increasing employment should be the responsibility of Congress and the president.
The alternative is the Fed delegating monetary policy to the private sector by printing billions of dollars and throwing them at multinational balance sheets.
“Given problems of this magnitude, American federal finances appear unsustainable and Reaganite spending cuts seem inevitable”
Despite its uncoordinated international interests, the private sector is then supposed to create just the right amount of inflation, growth and employment for America and just the right level for the dollar to boost American dollar-priced exports.
It is also supposed to spend the money in a way which contains the rise in overseas inflation and the decline in treasury yields as well as in the dollar, such that treasuries are still a store of value for overseas investors.
Overseas institutions are key investors in the treasury market, but the decline in dollars and treasury yields offer them highly negative returns, especially when adjusted for inflation.
Given problems of this magnitude, American federal finances appear unsustainable and Reaganite spending cuts seem inevitable. Public sector assets will need to be sold, while the country will need to attract private investment to renovate the country’s creaking infrastructure.
As the cuts kick in, the Reaganite agenda goes, the government will need to stimulate the private sector with tax cuts, preferably tax holidays on the returns from all job-creating investments.
This would not dent fiscal bills with heavy deductions, as the money would otherwise be sitting in cash or diverted into financial assets or overseas economies.
In compensation for the re-regulation of the financial and healthcare sectors, the government needs to overhaul the labyrinthine tax code and look at other ways to sensibly deregulate the private sector.
To secure its long-term finances, Reagan would have observed, America will also need to raise the retirement age to ensure pension and healthcare schemes are properly funded, especially with the babyboomer generation about to retire.
Whatever the outcome of the mid-term elections, a Reaganite agenda would not only be popular. As Obama and Congress should recognise, it would also work.