Death by strangling: the demise of state spending

The American economy reached a watershed 30 years ago when Ronald Reagan came into office. While Europe decided to boost its tax-to-gross-domestic-product ratio in the 1970s and 1980s to fund an expanded range of education, training, labour market and family support programmes, the US did not. Reagan insisted that less government was the key to prosperity and growth, and put emphasis on lowering tax rates on top incomes. Federal revenues in 2011 amount to 15 per cent of GDP, less than the 19 per cent of GDP of 1980.

Outlays on public services and investments other than healthcare and pensions have been badly squeezed. Non-security discretionary programmes, including education, energy, environment, roads, training, science and much more, have been hit hard. In the late 1970s, 5-6 per cent of national income was directed to these areas. Reagan slashed that to 2-3 per cent. Spending has remained at that lower level since, apart from a shortlived blip caused by the Obama stimulus.

America is unilaterally ceding its global leadership in education, science and infrastructure. Much of today's young workforce lacks the education and skills to sustain middle-class living standards, and unemployment rates are high and stuck as a result. Yet in 2008, as a candidate, Barack Obama said he too would aim for the same tax-GDP ratio as during the Reagan years! Mr Obama's promise of continued low taxation may have helped him to electoral victory, but it also planted the seeds of his policy failures.

Mr Obama speaks of investing in education, infrastructure and technology to restore competitiveness and jobs, but lacks the financial room to manoeuvre. The result is an utterly dispiriting contradiction between his soaring rhetoric about the role of government and the grinding cuts he has agreed with Congress. His entire economic programme rests on a fiscal fallacy.

According to July's debt agreement between Congress and the White House, non-security discretionary programmes will be further squeezed to below 2 per cent of GDP by the end of the decade. In short, other than war and a few transfer programmes, government programmes are being asphyxiated. Republicans claim that low taxes and small government have spared it from the European disease. That is utterly false. The US is vastly outperformed by northern Europe's high-tax-and-spend states.

These countries tax heavily but also spend efficiently. They buy superb public health, quality childcare, proficient public education, quality infrastructure and remarkable social equality. The results are lower unemployment rates, smaller budget deficits, much lower poverty and smaller trade deficits than in the US. These countries also enjoy higher social mobility, life expectancy and life satisfaction than the US.

Nor have they suffered slower growth in per capita incomes. From 1980 to 2009, US per capita income grew by an average of 1.7 per cent. Northern Europe averaged about the same. In the US, most gains accrued to the top of the income distribution. Median male earnings in the US have not risen since 1973.

America's greatest shortcoming is the way it treats its poor children. While northern Europe helps poorer families to raise children - through income support, uniformly high-quality state schools and so on - America increasingly leaves poor children to fend for themselves. Affluent families get their children through college; poor families do not. The US underclass is bulging. The Republicans propose to strangle government once and for all. Mr Obama's policies suffocate federal programmes slowly. His favoured tax measure is to allow the Bush-era cut on the top income tax rate to expire, so lifting the top marginal rate from 35 per cent to 39.6 per cent and collecting about 0.5 per cent of GDP.

To finance the outlays needed on education, infrastructure, family support and technology, taxes on high incomes will have to rise by several per cent of GDP. America requires a combination of higher personal, corporate, estate, net-worth and financial-transactions taxes, with better tax enforcement, to collect about 4 per cent of GDP more in federal revenues. A brave presidential candidate following in the Roosevelts' footsteps will win office one day and put the US back on a path to high employment and recovery of the middle class.

The writer is director of The Earth Institute at Columbia University and author of 'The Price of Civilization'