The Financial Times

A State of the Union Address to Bridge the Great U.S. Spending Divide

In U.S. domestic policy, two large and intertwined disagreements divide the political parties — the role of government and the appropriate scope of public spending. In his 2011 State of the Union address, President Barack Obama did little to bridge the former but opened the door to narrowing the latter.

Mr. Obama offered a narrative of America’s current economic challenges organized around the themes of technology and globalization. In that frame, government is not the problem, as most conservatives insist, but rather a vital part of the solution. Consider some key pillars of the president’s approach. Throughout our history, he insisted, government has spurred innovation. (He cited computer chips, GPS and technology spinoffs from the space program.) Today, he said, we must do the same, especially to accelerate the transition away from fossil fuels. Reforming education, too, is a public function, one in which the federal government has an essential role as investor and standard-setter. And rebuilding America’s neglected infrastructure will require public funding and leadership to get private capital off the sidelines.

Mr. Obama’s vision is of government as an economic partner with the private sector, an actor whose outlays can accelerate private sector growth and job creation. This is not to say that government cannot spend wastefully, tax inefficiently and regulate ham-handed. It can and it does, which is why the president called for corrective action in all these areas. But, in his view, the harm that government may do is sub-ordinated to the good that it must do. This is not a perspective with which many Republicans are likely to agree.

However, regarding the second great divide – public spending – Mr. Obama went farther than many skeptics thought he would. As expected, he proposed a five-year freeze on discretionary non-security spending. But he went on to say that this addressed only a small part of the overall budget, and he surprised many pundits by citing favorably the work of his bipartisan fiscal commission. While he made it clear that he did not agree with all its proposals (almost no one does, including the commissioners who signed on), he endorsed its basic framework, which included reductions in the largest health programs – Medicare and Medicaid. He endorsed corporate tax reform, and noting that members of both parties had expressed interest in simplifying the individual income tax code as well, he declared his willingness to join them. While carefully limiting the kinds of changes he was prepared to accept, he even ventured into the perilous swamp of Social Security reform.

By uttering these words, Mr. Obama has opened the door to the kind of broad-based bipartisan deliberation that fiscal experts regard as essential. In the short term, his opposition seems unlikely to walk through that door; rather, the Republicans will focus on radical cuts in discretionary spending while they debate among themselves the political wisdom of taking on the much larger and more significant health and retirement programs. The increased support they are receiving from older Americans – the principal beneficiaries of these programs – will surely give them pause. But farther down the road, economic imperatives and political logic are likely to converge. The question is how long it will take, and how much more America’s economic leadership will weaken before it finally acts.