Whats happening Well-intentioned technical design is getting enmeshed in a web of sectional interests, distributional conflict and ideology. In other words, this is the real, messy business of effecting change.
Why is this of interest to India First, the US Government plays a pivotal role in the global economyand this is a lot more important to India now than it was ten or twenty years ago. Recall that Indias boom of the 2000s was on the back of unusually propitious global conditions for trade and finance, underpinned by financial bubbles and the profligacy of American consumers. Now, even if China and India keep growing at a reasonable pace in the short runand thats a big ifthey remain too small to have a significant impact on global demand. Absent major action from the US, it is unlikely that Europe will do enough. Japan is already too badly hit to do much more than reduce its decline. In the US itself, consumers are rebuilding their balance sheets (that is increasing savings) and the corporate sector is hurting. Monetary policy has lost its short-run purchase. That leaves the US government.
Second, while India doesnt have a financial crisis, the structure of the policy position has similarities: the Indian government also faces a challenge of combining support for short-run relief with action that underpins long-term growth and initiating credible medium-term fiscal consolidation.
So lets go back to US. A fiscal stimulus is justified because it can offset falling private demand in the short term. It is doubly justified because the economy looks like it is going into a hole that will be hard to get out of. The government can afford to spend. Private holdings of US government debt are 40% of GDP (compare 80% for India), and, at least in the short run, people still want to hold this debt. Then there are two kinds of long run issues: real sector constraints on long-term growthcreaking infrastructure and failing schools; and big fiscal liabilities from pensions and the medical costs of an ageing population.
This suggests three criteria for a fiscal strategy: high levels of short-run spending focused on those hurt most and who can least afford it; longer-term capital renewal where this is consistent with the first criterion; and credible signaling on longer-term fiscal consolidation.
This implies priority to unemployment benefit, food stamps, and spending on social and physical infrastructure, combined with initiation of social security and Medicare reform. An Indian parallel would include fiscal backing for the National Rural Employment Guarantee Scheme, support for existing infrastructure plans, complemented by credible action on subsidies. This all looks good on paper.
But this is where the fights start, and these are embedded in both distributional and ideological differences. In the US, most Democrats like spending, especially on their favorite projects, often for middle and poorer groups. This is backed by an ideological view that the state can be an effective agent for redistribution and long-term growth. By contrast, most Republicans like tax cuts, cuts that have greatly favoured richer groups in the recent past. Tax cuts are also preferred on the ideological ground that the state is part of the problem, not the solution, to most issues. These are real conflicts, that will only become sharper when reform of social security and health care are on the table.
The likely outcome on the stimulus is a compromise of a bill equivalent to perhaps 2.5% of GDP, with over a third in tax cuts. That will do some good, but is likely to be insufficient to restore growth. Meanwhile, the need for fiscal consolidation will only rise in importance as the debt increases.
What does this tell us about change The Obama team came to government with a theory of change that involved both a modern form of social mobilisation and a commitment to work within the political and economic system. This remains a good theory. But the political and economic system is thick with resistance, from both interests and ideology. This is as true of the US as it is of India. It would have been surprising if these all faded away in the wake of a euphoric election. The fight over the fiscal stimulus is just the beginning of a drama of many acts. Conflict will be a healthy part of the action. Unlike in the theatre, this drama really matters for all of us.
The author is at the Harvard Kennedy School, the Institute of Social and Economic Change, and the Centre for Policy Research