Where is America headed?

Published on 2016/02/23
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In Germany, perceptions of the election campaign in the United States are largely being shaped by the occasionally alarming statements made by Donald Trump. In my opinion, Trump is nothing more than a counter-reaction to the political correctness that has hindered free political debate in the United States, and elsewhere, for years, if not decades. One reason for Trump’s success is that he doesn’t care if he uses language deemed taboo by proponents of political correctness. Many view this as liberating, particularly those for whom political correctness, invented by left-wing intellectuals, has long been a source of annoyance. Unfortunately, Trump doesn’t really care about humane of libertarian values either. His repeated calls for a strict ban on Muslims entering the United States are what appear in the media most often. His thinly veiled justification of torture has also drawn a great deal of attention.

In light of Trump’s provocative statements, we in Germany often lose sight of the fact that America’s election represents a choice between two opposing economic and political paths. On the one side, the Democrat’s Bernie Sanders, and on the other side the Republican’s Trump and Ted Cruz, embody two mutually exclusive courses the United States could follow in its economic and tax policies.

Bernie Sanders delivered the biggest surprises of the first two primaries. Hillary Clinton struggled to eke out a wafer-thin lead over Sanders in the first primary, before he dealt her a substantial defeat in the second. Sanders openly describes himself as a socialist. Sanders’ campaign has been churning out the same kind of anti-capitalist slogans we last saw from France’s President Hollande when he was on the election trail. Donald Trump and Ted Cruz represent a diametrically opposite position, with Cruz very close to the Tea Party.

Taking tax policy as an example, it is clear that the gulf between Sanders and Trump (or Cruz) couldn’t be greater. Sanders wants to increase taxes, particularly for high earners. The top income tax rate in the United States is 39.6%. Sanders wants to increase this to 43% on incomes between $500,000 and $2 million, with even higher rates of 48% and 52% on incomes above that level. In stark contrast, Trump is calling for the top rate of income tax to be cut to 25%. The rate should apply to single persons with incomes over $150,000 and couples with combined incomes over $300,000. Cruz has even called for the introduction of a flat income tax for all Americans, irrespective of earnings. As far as their economic policies are concerned, the Republicans pursue libertarian ideals. Corporation tax, currently 35%, has been targeted for an increase by Sanders, whereas Trump and Cruz both want to lower it to 15%.

In the USA, the fight is over which path the country should take. But it is not a new fight. The dominant image Europeans have of America is a distorted one. We see the United States as the embodiment of unfettered capitalism. This image is just as unrealistic as the one some Americans have of Germany as the land of beer, lederhosen and the Oktoberfest.

It is sad but true that America turned its back on a pure capitalist doctrine decades ago. Calculations have shown that American states increased their social spending between 1940 and 2007 by a factor of 472. Even when inflation is stripped out of the equation, they spend 35 times more than they used to. Taking population growth into account, social spending is still 15.3 times higher.

As early as 2013, the author Samuel Gregg published a very readable book, “Becoming Europe,” in which he warned of a growing Europeanisation of the American economy – along with all of the consequences that would entail. Above all, this is a question of political and economic culture, in particular of people’s attitudes to market economics. America stands at a crossroads: “Do Americans want to embrace modern European economic culture? Do they want to live in a set of economic expectations and arrangements that routinely prioritize economic security over economic liberty; in which the state annually consumes close to 50 percent of gross domestic product; where the ultimate economic resource (i.e. human beings) as ageing and declining in numbers; where extensive regulation is the norm; and perhaps above all, where economic incentives lie not in hard work, economic creativity, and a willingness to take risks, but rather in access to political power? Or do Americans want to embrace the opposite? Do they want to live in an economy in which economic entrepreneurship is rewarded; where the government’s economic responsibilities are confined to a number of important but limited functions; and where the stress is upon economic liberty, rather than remorseless efforts to equalize economic outcomes though state action?”

Obama was, and always will be, convinced that he needs to correct America’s path and steer the country towards a European-style welfare state. Edward Klein wrote about Obama in his book, “The Amateur,” and his belief “that he was chosen as president to save a wayward America from its dependency on free-market capitalism. This has led him to push clumsy and unpopular far-left policies – universal healthcare, Wall Street bailouts, cap and trade, green jobs and renewable energy – at the expense of rational policies aimed at putting America back to work.”

Sanders is committed to maintaining Obama’s course, but wants to be even more radical. In direct contrast, Cruz and the other Republicans want to reverse America’s march towards a welfare state – a development that did not only begin with Obama. Beyond the shrill slogans, there are important questions being asked: Which direction should we take? More free market economics, or more state intervention? More economic freedom, or more regulation? Higher taxes for high earners and the wealthy, or tax cuts?

Read also Rainer Zitelmanns Finance Blog.

About the Author

Dr. Rainer Zitelmann is one of the leading experts for the strategic positioning and communications of companies.