Monday, 1 August 2011

Away from the brink, but into the quagmire

So, American politicians did a deal on their debts after all. It looked like they might not there, for just a while.

Sigh of relief? Well, yes - for the consequences of a debt default, or even a partial mess of a deal and a debt downgrading might have been near-catastrophic for the world economy as a whole. I might have lost my job in the economic ice age that could have followed. So might you.

So one-and-a-half cheers for the Congress and the President of the United States (above).

Why only one-and-a-half? Because this deal will further slow the American economy; raises the prospect of worldwide economic sluggishness for years to come; and might leave us right back in this horrible mess when we approach the debt 'ceiling' once more.

Americans' problem is a lack of demand - not enough spending, not enough investment, too few consumers. How to remedy this? Well, quite a few economic commentators and experts - including Nobel Laureates - would say exactly what I'd say about the UK. Cut less; borrow more; raise some taxes as part of the mix (because you can then spend the surplus that might otherwise have been saved, boosting demand). But this deal radically tightens American budgetary policy, reduces the federal government's room for manouevre if the economic downturn begins to look gloomier than it already does, and contains absolutely no specific plans for tax rises. None. Nada. There's going to be a trillion dollars of cuts right away, and then negotiations about about another trillion and a half of 'deficit reduction', which may well mean 'cuts' as well. Put all this together, and the United States is not going to be tugging any of us towards recovery any time soon.

Paul Krugman's excoriating op-ed piece for the New York Times might go a little far on all these fronts. I don't think 'surrender' is quite the right word. There is at least a possibility that those 'second stage' negotiations, to be conducted by a joint committee of both Houses of Congress, will allow liberals and centrists to fight another day. Recommending another great big slice of cuts won't sit well with most voters, and the President and his party do live to see yet another round of wearying arguments. They'll attempt to turn the debate over that second round into a row about threats to valued social programmes - though their record in this respect hasn't been great over the last two or three years. And when the debt ceiling does come up for renewal in 2013, it'll be in synch with Bush-era tax cuts for the rich, meaning that President Obama will be able to sell ending the latter as part of a general deal. Assuming he's still President by then, of course.

But over-caution; retreat; downright weak-willed, weak-kneed loss of fighting ardour in the face of a bunch of crazy ideas? These certainly are terms we can use.

As for the politics of this, as the President in fact put it eloquently the other day, America has a triple 'A' credit rating, but not a triple 'A' political system. There's plenty of room for the parties to fall out in the Congressional 'super-committee' and walk away from a deal, especially in the months leading up to a Presidential election. And consider the longer-term consequences of making what has always been a technical vote into a bitter partisan test of loyalty. Think Democrats are going to forgive and forget this one when a Republican sits in the White House two, six or ten years from now? When they are so, so angry right now? Nope.

So we are in for some low growth. And year after year of budgetary crises and blowups.

We've stepped away from the brink, but into the quagmire.

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