Why Has American Budgeting Failed?

October 21, 2013

WASHINGTON (October 21, 2013) - The recent government shutdown and debt ceiling brinksmanship just postpones the time when the nation's budget issues will have to be addressed. Unfortunately the "Washington consensus" on the budget, based on neoclassical economic thinking, leads to the wrong solutions. With its focus on cutting debt, rather than the debt-to-GDP ratio, and its overriding mantra that "everything should be on the table," this mantra, being promoted by groups such as Simpson-Bowles, Domenci-Rivlin, The Concord Coalition, and the Committee for a Responsible Federal Budget, is generating budget solutions that will lead to less, not more U.S. growth.

It is time for a budget debate that is based on a new approach to economics, innovation economics, that focuses on maximizing innovation and long-term growth. A new report by the Information Technology and Innovation Foundation (ITIF), Innovation Economics: How a New Theory Casts Light on an Old Problem of the Budget Deficit, argues that any budget solution must set a goal of improving the debt-to-GDP ratio as opposed to simply cutting the debt. It also needs to actually increase public investment and cut corporate taxes to drive growth, even though in the short run these steps will increase the budget deficit.

"The primary economic challenge facing America right now is neither a lack of government stimulus nor large budget deficits; it is a loss of economic vitality that has reduced our ability to create jobs, compete globally, increase productivity, and raise living standards across the board," notes Robert Atkinson, President of ITIF and author of the report. "To ensure a vibrant and growing economy, we need a new approach to the budget and the national debt, which boosts growth through policies that increase investment, significantly cut the effective corporate tax rate, and increase work hours, particularly by significantly extending the retirement age."

These policies will be much more effective at spurring growth and U.S. competitiveness, which is what the ultimate goal of any economic policy, including budget policy, should be. Moreover, by spurring growth, these policies will help cut the debt-to-GDP ratio, a more accurate measure of the government's fiscal condition.

"The most important factor in a healthy economy is the ability to boost productivity, innovation and competitiveness," Atkinson adds. "The dominant approach to budgeting would weaken all three by leading to reduced investments and increased corporate taxes. It's time for a new approach grounded in the doctrine of innovation economics."
 
Later this year ITIF will release a second report that will include a more detailed list of policy recommendations designed to implement this approach.

Read the report.

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The Information Technology and Innovation Foundation (ITIF) is a non-profit, non-partisan think tank whose mission is to formulate and promote public policies to advance technological innovation and productivity internationally, in Washington, and in the states. Recognizing the vital role of technology in ensuring prosperity, ITIF focuses on innovation, productivity, and digital economy issues. Learn more at www.itif.org.