HONG KONG – U.S. politicians are in the thick of a debate that is fascinating, urgent, passionate, stubborn and potentially highly dangerous both for the American economy and for the country’s political reputation and standing in the world.
It is a tragic measure of the purblind failure of leaders of both parties — I am tempted to say all parties because there are so many squabbling factions — that they are playing a game of chicken just when there are so many doubts about the recovery and whether the U.S. can any longer be trusted as a global leader.
The argument is over whether to raise the $14.3 trillion ceiling on U.S. federal debt, a level that was reached May 16. Unless and until Congress raises the ceiling it means that the U.S. government cannot borrow any more money. Treasury Secretary Timothy Geithner has said that he can juggle with the accounts until Aug. 2, the outside limit.
It should be a simple matter, since after all Congress has raised the debt ceiling 10 times since 2001. Surely, no one really believes that the Congress would expose the country to the awful unthinkable consequences of not raising the ceiling — do they? But Republican presidential candidate Tim Pawlenty suggested that the consequences might not be as dire as the White House claims.
President Barack Obama has said that failure to raise the ceiling would send the world spinning back into recession. “Catastrophic” is the expression favored by Geithner and Ben Bernanke, the chairman of the Federal Reserve Board.
If Aug. 3 arrives without the ceiling having been raised, the U.S. would not be able to pay its military and would stop paying interest to owners of government bonds, and that would trigger disaster: Credit markets would seize up, stock markets would plunge, interest rates would soar, and the talk would probably not be of recession but depression. The U.S. would hasten its own decline, since who would trust Washington, U.S. debt, the dollar?
Even now it is a dangerous game. How close do the politicians want to go to the cliff edge to see whether investors might be tempted to stop buying U.S. debt in spite of its liquidity because they can’t trust the competence of Washington?
Prince Alwaleed bin Talal, sometimes known as the Arab Warren Buffett because of his massive investments, warned last month on CNBC that the U.S. was not giving “much care and attention to this time bomb that you have right now here.”
Republicans in Congress are holding up any deal because they want to get agreement to cut trillions of dollars from government spending over the next 10 years, part of a concerted effort led by rightist “tea party” members, who view spending cuts as the ready-made answer to America’s prayers. They are not prepared to see compensating tax rises.
Some of them, led by the darling poster boy of the right, Rep. Paul Ryan, have proposed savage cuts to Medicare, the government health care program for Americans aged 65 and above.
All this is coming at a dangerous time for the U.S. economy. The recovery has been described as both jobless, because unemployment is still 9 percent, and a “McJobs recovery” because the jobs that are on offer are low-paid ones.
Indeed, on April 19, McDonald’s burger chain hired 62,000 new workers nationwide — more jobs created in a single day than the net job creation of the U.S. in 2009. But a million people applied for those jobs, which pay about 55 percent of the U.S. average national wage.
Some economists see the U.S. entering a period of what Tyler Cowen describes as “the Great Stagnation” because the great productivity gains from 20th-century innovations are rarer now. Others hold out great hopes of renewed rapid growth from the Internet and the digital revolution.
But in Washington, both in Congress and in the myriad think tanks that have sprung up to support rival political ideologies, there is no meeting of minds.
The Heritage Foundation tried to underpin Ryan’s savage budget proposals — to cut spending by $6.2 trillion, reduce the deficit by $4.4 trillion over the next decade while reducing the top rate of income tax from 35 to 25 percent — by claiming that it would lead to a housing boom overnight, a huge spurt in growth, and an unemployment rate of only 2.8 percent by 2021. In the face of ridicule from economists, Heritage backtracked on the unemployment figure.
David Rosenberg, chief economist at the Canadian wealth management concern Gluskin Sheff, and one of the most thoughtful and levelheaded economists, last month warned that the United States “may get into quicksand if it does not get its fiscal act together soon.”
He cited the experience of Canada in the 1990s and advocated a mixture of tax rises — which the U.S. Republicans refuse to countenance — and spending cuts — which the American Democrats have begun reluctantly to accept — as the correct recipe. But Rosenberg warned it would be painful.
In 1993, Canada had a deficit-to-GDP ratio of 5.6 percent, better than the U.S. today, and federal debt to GDP of almost 70 percent, about the same as the U.S. today. Canada had the political will, Rosenberg noted: “Taxes were raised, spending was cut, government operations privatized, social contracts rewritten, and what at one point would have been deemed ‘untouchables’ (like means testing and clawbacks for social security) were not just touched, but squeezed.”
For the U.S. too, “The process will be contractionary, deflationary and very bullish for the bond market as supply recedes, and will ultimately pave the way for more sustainable economic growth, including the return of capitalism.”
Today, Canada’s debts to GDP are 34 percent, the envy of the developed world, the deficit has swung into surplus, and Canadian assets are in high demand. It is tough, but it is tougher still if politicians are not talking to each other and playing with neo-voodoo economics.
Kevin Rafferty is editor in chief of PlainWords Media, a consortium of journalists interested in issues of economic development.