The American debt deal

Published: August 4, 2011
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The writer is a former chief economist of the Planning Commission and is based in Lahore
pervez.tahir@tribune.com.pk

The writer is a former chief economist of the Planning Commission and is based in Lahore pervez.tahir@tribune.com.pk

Better believe it. Washington has been as dysfunctional as Islamabad. Prime Minister Vladimir Putin of Russia has labelled the American economy a “parasite”. In reaching the debt deal on the first day of this month, Republicans as well as Democrats employed every trick in the armoury of dirty politics. Mud-slinging, figure fudging, brinkmanship, one-upmanship, ideologisation bordering on stupidity and a complete lack of leadership were only a few features of this gory theatre. Instead of dealing with the mounting federal deficit with a straight bat, fiscal fist fighting was staged to rehearse the coming presidential battle. There was utter confusion about who stood for what. At one point it seemed as if US President Barack Obama was about to join the Tea Party — the Talibans of the GOP (Grand Old Party). Congressmen positioned and postured to score points, totally oblivious to the suffering of the ordinary American resulting from deepening economic recession, rising joblessness and, yes, increasing poverty and homelessness.

Bush Jr inherited a budgetary surplus from Bill Clinton. No one, not even the Democrats, had to plead for increasing tax revenues. But a series of cataclysmic events sent the expenditures skyrocketing. The post-9/11 fortification of mainland America, the elusive chase of WMDs in Iraq, the war on Taliban in Afghanistan and Pakistan and the global hunt for al Qaeda caused enormous increases in security spending. In other expenditures, the Medicare bill went up with the addition of a drugs provision benefiting senior citizens. In 2008, the sub-prime meltdown witnessed the federal government spending billions to bail out finance and automobile bosses rather than those who had lost their homes. All these events bloated the expenditure side of the budget. During this joyride on expenditures, no tax measures were taken. As a matter of fact, the shrinking economy lowered tax yields. The drama of the absurd continued regardless: the rich and the powerful were allowed two tax cuts. With no compensating revenues for the rising expenditures, the deficit had to go through the roof. So did the debt, rendering the congressional ceiling meaningless.

The deal raises the debt ceiling but requires an equivalent cut in spending. A joint committee will look at possible additional cuts of around $1.2 trillion in the next decade within two weeks. That is why it is being described as a super committee. A lack of agreement could lead to automatic cuts across the board. The deal contains no action on taxes. As Republicans would be reluctant to apply the axe to national security, Democrats hope they might give in on taxation. Credit ratings are not yet down from ‘Triple A’, but the economy has been put on negative watch. This means the ratings will change, the moment there are adverse developments. In short, the US economy is already in a sink. Manufacturing output is down and consumers do not have money to spend. Even companies sitting on a lot of cash are reluctant to invest. President Obama’s announcement soon after the debt deal to resume his jobs campaign seems hypothetical. The unemployment rate in June was 9.2 per cent. Latest numbers to be out today, August 5, are not likely to be a pleasant present on his 50th birthday. With no fiscal space, the onus falls on the Federal Reserve. However, near-zero interest rates have done nothing to put life into the economy.

While the ordinary American worries about a shrinking pocket, the done deal has hardly changed the entrenched positions. The deal was between the old guard on both sides of the aisle. The Tea Party rejects the old guard, the so-called Washington establishment. In fact, its members did not vote for the deal.

Published in The Express Tribune, August 5th, 2011.

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Reader Comments (3)

  • Meekal Ahmed
    Aug 4, 2011 - 9:38PM

    PT, I share your angst and no words are adequate to describe what has happened over the past few months. US politicians have made a laughing-stock of themselves in front of the whole world.

    The up-side is that our assemblies of worthies look good!

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  • Incredible
    Aug 5, 2011 - 2:44PM

    PT, will appreciate a similar analysis of Pakistan’s wonder by you.

    Recommend

  • abbasfrom the US
    Aug 5, 2011 - 4:52PM

    Dr. Tahir,
    You seemed to have summed it up pretty well it terms of everything that has gone wrong and has led to this economic debacle. In Essence it has turned out into an American pessimist’s worst case scenario. Though in the end of your article when you mention that the ball is now in the court of the Federal Reserve which having tried out the lowering of interest rates has reached flat bottom, and its experiment with quantitative easing has also not brought about significant results.

    Till 1994 the US house of representatives was exclusively controlled by the Democrats for about 40 years, this is no longer the case since then. The US congress will henceforth always be controlled and have a majority of the other party due to reaction politics of whoever controls the Presidency. The polarization and ideological driven discourse may become more pronounced as the search for solutions continues.

    But wait, the US economy cannot be written off as has been, or a spent force. The question is who is really gaining on the United States? With the Eurozone a basket case, that may require the German people to continue to bail out the cross they have voluntarily taken upon themselves to carry for possibly the forthcoming decade or more, at the same time growth stagnation in the overall European economy. The Chinese political and economic structural reconciliation is still an unknown factor as to how it will play out.
    And If the future of the US economy was all that bleak how come the rest of the world continues to heavily invest into the US economic future.

    Read this http://www.bloomberg.com/news/2011-08-02/obama-bonds-proved-world-beaters-as-congress-played-chicken-with-u-s-debt.html

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