The great American atrophy

US labour markets, R&D budgets and private sector confidence continue to wither with each day of the shutdown. Obama can't duck and weave for much longer.

FT.com

Imagine you are a US federal employee. Washington recently declared you “non-essential” and you are about to start your third week on enforced leave. Perhaps the government will reopen this week. Maybe it will take several more. It does not affect the big picture. You are in your fourth year of a pay freeze and it would take a lot to restore your morale. Much the same applies to the US government. Shutdowns come and go. But the system’s atrophy goes on.

Avoiding disaster is turning into President Barack Obama’s abiding role. Top of the list is stopping a sovereign default, which would eclipse any other economic damage Washington could inflict. In today’s climate, even a six-week reprieve on the debt ceiling counts as progress. But the opportunity cost of persisting with this lethally irrelevant debate is huge. The longer the US squabbles over the basic legitimacy of government, the less hope there is of making it relevant for the 21st century.

Unlike a sovereign default, the costs of government sclerosis fall mostly under the radar. But they also subtract from future US incomes. Governments in Asia are retooling to adapt to changing technology and are investing heavily in their people’s skills. With the exception of the mushrooming of the post 9/11 national security complex, Washington’s budgets have been falling.

The federal government employs roughly 2 million civilians – the same as it did in the 1950s when America had less than half the population. It has long been a semi-formal cap. Republican and Democratic administrations get around it by using contractors, such as the company that employed Edward Snowden. Most of the outsourcing is within the defence and data intelligence complexes. Washington would save a lot of money if it did more of this work in-house. But public contractors are unusually generous campaign donors.

But for the most part, the cost of inefficient US government can be measured by its attrition. Napoleon once said you should never interrupt your enemy while he is destroying himself. It is possible Republicans will implode as a party and leave the space wide open for Obama to regain control of the agenda. But it is unlikely. That should not stop him from making the case for more effective federal government. There are three areas where it is urgent.

First, the US labour market is desperate for better training at a time when technology looks to be winning the race against education. It is a slow-burning US national emergency. In the 1950s Washington boosted spending on education in response to the US race with the Soviet Union. It succeeded beyond expectation. According to a report last week by the OECD, the club of mostly rich nations, the oldest generation in the US labour market – those between 55 and 64 – is also its most proficient in maths and literacy. Overall, the US ranked below the developed-country average in its labour-force skills. But it was unique in having a better-educated older workforce. Everywhere else the young scored higher on skills. No indicator better captures the urgency of America’s employment challenge. In the absence of US immigration reform – another casualty of the budget crisis – homegrown training is even more critical.

Second, others are rapidly catching up with America’s research and development budgets. The US still outspends other countries. But a growing share is spent on development rather than research. In 2000 China’s R&D spending was less than a 10th that of the US. Now the figure is roughly two-thirds. Moreover, countries such as China go to great lengths to treat their scientists as indispensable. In the past two weeks most employees at the National Institutes of Health and the Centre for Disease Control have been deemed non-essential. As my colleague Stephanie Kirchgaessner reported last week, the NIH budget is down 11 per cent in real terms in the past decade. Last week three NIH scientists won the Nobel Prize for Medicine. Even before the shutdown, “adventurous research” was on the decline, says Andrew Rothman, one of the winners. The NIH R&D budget is set to fall again this year.

Finally, uncertainty about what Washington will do next is fuelling the investment freeze by US private sector companies. Unless they are confident there will be a market for their products, they are unlikely to step up spending. Instead of stimulating investment, Washington is putting it off. The continued drop in the US infrastructure budget is just as ill-timed as the cuts in training and innovation. The demand for a more strategic US government is rising. But the supply keeps falling.

The US is in the throes of an epochal battle over government’s legitimacy. The last party to hold the entire system to ransom was the Democrats, in 1860. That led to a bloody civil war that paved the way for modern federal government. The south is still fighting some of its consequences. It is probably no coincidence this latest escalation is taking place under the watch of America’s first black president. Partly as a result, Obama is on course to leave government in a weaker condition than when he found it. That is not the legacy he sought. Preventing default will not be enough. Obama needs to make the case for what is essential.

Copyright The Financial Times Limited 2013.

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