US presidential election: the issues at stake

Ballot6 November 2012

As the US presidential election day has arrived, the ESRC Centre for Economic Performance (CEP)'s series of US election analyses offers insights into key election issues.

The US economy is still suffering from its most severe recession in seven decades. "Given the enormity of the short- and long-run fiscal challenges facing the US, the lack of policy detail from both presidential candidates is disappointing," Ethan Ilzetzki and Jonathan Pinder conclude in the CEP report Recession and recovery: the US policy debate on taxes, spending and public debt.

While Governor Romney has proposed using tax revenues from the closing of unspecified tax loopholes to extend the 2001 tax cuts, reduce tax rates and corporate taxes, President Obama would extend the 2001 tax cuts and limit tax deductions for high-income households.

"Governor Romney's tax reform will contribute nothing to reducing the deficit but everything to financing tax cuts," claim Ilzetzki and Pinder. And Obama's proposals would only raise about 1 per cent of GDP - insufficient to deal with the fiscal challenges over the long term. The CEP report instead highlights the recommendations from the bi-partisan Simpson-Bowles Commission, which proposed raising tax revenues through eliminating deductions, increasing the retirement age and reducing entitlements.

The financial crisis has triggered widespread uncertainty over policy, both in the US and in Europe. "Some research suggests that uncertainty, particularly over economic policy, partly explains the sluggish nature of the recovery," the report Economic recovery and policy uncertainty points out. The authors suggest that political polarisation has reduced the possibility of a bi-partisan approach to US policy-making, in turn contributing to economic uncertainty.

This uncertainty can affect major firms, who prefer to ‘wait and see’ rather than invest and hire new employees. It can also impact on borrowing costs for businesses and consumers, as well as discourage households from spending. “According to one recent study, restoring policy uncertainty to levels that prevailed before the financial crisis would raise employment by an estimated 2.3 million over 18-24 months,” the report concludes.

Healthcare has been a prominent issue in the presidential campaign, and "is the leading cause of long-term US public debt", according to Healthcare reform: the US policy debate. President Obama's Affordable Care Act (ACA) requires nearly all US residents to obtain health insurance, and introduces measures to control healthcare spending, primarily through changes to how Medicare - insurance for the elderly - reimburses providers.

Governor Romney proposes to repeal ACA and change funding for the Medicaid (insurance for the poor) and Medicare programs from a focus on 'defined benefits' to 'defined contributions', shifting healthcare spending from federal to state level – "but at the cost of substantially increasing individual healthcare spending and leaving around 45 million fewer Americans insured", the report points out.

Rising inequality and the privileged 'one per cent' has been another contentious issue. Income and wage inequality has risen sharply since the 1970s, and the US has the highest inequality of all rich countries, according to the fourth CEP analysis, Inequality and opportunity: the return of a neglected debate.

"Social mobility between generations is worse in the US than in most countries where it is measured," authors Stephen Machin and John Van Reenen conclude. They suggest that one of the major causes for inequality is that the education system is unable to meet the ever-increasing demand for skilled workers in a technology-based economy.

President Obama wants to allow the 2001 tax cuts to elapse for households on incomes over $250,000 – which would result in a federal tax rate rise from 35 per cent to 39.6 per cent. However, "this only deals with the symptoms of inequality, not the causes", the CEP report suggests.

Governor Romney opposes tax increases on the rich, arguing that it will reduce incentives for business and enterprise, with a knock-on effect on the economy. Instead he advocates educational reforms to introduce more charter schools and weaken the power of teachers' unions.