Although Cameron's brand of conservatism (for example, he favors a carbon tax) makes Newt Gingrich and Rush Limbaugh wince, there is no doubt conservatives would make major changes in fiscal policy. Before an election, the conservatives are talking about reducing the national debt by cutting spending. If elected, Cameron's Chancellor of the Exchequer (the U.K. equivalent of the U.S. Treasury secretary) would be George Osborne. Here's what Osborne wrote last week on his website.
- We should have the confidence to tell the public the truth that Britain faces a debt crisis; that existing plans show that real spending will have to
be cut, whoever is elected; and that the bills of rising unemployment and the huge interest costs of a soaring national debt mean that many
government departments will face budget cuts. These are statements of fact and to deny them invites ridicule.
As The Economist points out: "Britons may not have become, suddenly, a race of zealous state-shrinkers; but, because of the downturn and doubts about the efficacy of New Labour’s decade-long splurge, they are not as allergic to cuts as they once were."
Meanwhile, back in the USA, it's another world. We are talking about expanding healthcare coverage and increasing the size of government. And the Congressional leaders hell-bent on healthcare reform refuse to disclose how they plan to pay for it. The U.S. long-term fiscal outlook -- worse than the U.K.'s -- is being ignored.
Nobody wants the U.S. to cut the recovery short with fiscal tightening too soon and repeat the mistake the U.S. made in the middle of the Great Depression. Christina Romer, the Chairman of the President's Council of Economic Advisors, recently wrote: "To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession-within-a-recession." But what is critical for economic recovery is that there be a credible plan for long-term deficit reduction in place. Bill Clinton understood this in 1993 and it became the basis of what became known as "Rubinomics." Economist Frederic Mishkin made the same point in today's Wall Street Journal: "the failure to take steps to get future deficits under control is a recipe for disaster."
Obama should do something now about future deficits. He does not have to go so far as the Germans who, as reported in today's Financial Times, have changed their constitution to severely reduce and then eliminate budget deficits. He might, however, consider adopting something akin to the U.K. conservatives' plan to create a new "Office of Budget Responsibility." This body would be somewhat like the U.S. Federal Reserve -- quasi-independent, one-step removed from the political process. It would not have power to make policy like the Fed, but it would be given an institutional role in the budget process. It would be charged with monitoring the long-term fiscal health of the government. Policymakers would have to explain whenever their proposed budgets were not consistent with long-term sustainability. Fiscal sustainability is something the President and Congress cannot blissfully ignore. That may have been OK in the past. But in these times, that is something they cannot be allowed to do.