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, not more, government was the key to prosperity and growth, and put emphasis on lowering tax rates on top incomes. Federal revenues in the fiscal year 2011 amounted 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.