The fate of the US (and, through the subsequent endemic ripple effect, much of the World’s) economy hung in the balance to the bitter end. Why? Because of stubborn ideological division. Will Griffiths shares his thoughts.
The emerging markets of India and China may be the economic future, but until they have stable economies, backed by sustainable inflation and interest rate policies, it’s necessary for the old economic order to stay in the driver’s seat. There is a problem for Mr Obama as he drives through town however, he’s heading for road works and he’s missed the last chance to turn off. A long, frustrating and tense wait is ahead. As the months creep slowly by and bit by bit he crawls forwards, the cause of the obstruction comes into view; an overturned lorry is blocking the road. Written down the lorry’s side in paint which shines unashamedly are the words ‘National Debt’. This, I feel, is going to strike the final nail into Obama’s dreams of changing the US along the lines he had intended. The debt deal which has been agreed upon, perhaps somewhat expectedly given the ideological divisions between the main players, doesn’t especially favour anyone. But then, nor does it hinder anyone either.
So what then has been agreed upon? Well, of immediate importance an instant increase in the debt ceiling of $400 billion has been authorised, which will no doubt ease the concerns of the financial markets. The limit can eventually be raised by up to $2.4 trillion. The compromise sees spending cuts coming into effect, counter to President Obama’s plans (he had intended to put in place a second stimulus package), though they are rather insignificant in the grand scheme of things. Savings of just $900 billion over the next ten years is all that are intended as yet. There is nothing in place regarding tax rises, which will undoubtedly be of annoyance to liberals.
On both these points (spending cuts and tax rises) there is some wiggle room available. Top bracket tax breaks of the Bush era are due to expire in 2013 and Obama is not under any obligation to renew them. The initial $900 billion spending cuts over ten years are to be supplemented by a further $1.2 trillion in deficit savings which will be decided upon by a new cross-party congressional committee, whose plans will be presented for approval in October. These cuts are likely to hit defence spending particularly hard, with pension payments and healthcare for the poor ring-fenced. The final point of significance in the deal is a constitutional amendment to be made before the end of the year. The amendment, the precise wording of which has yet to be ironed out, will require future federal spending to be balanced. In other words, Government expenditure cannot exceed revenues.
Disaster has been averted for the time being then; the highly coveted AAA financial rating has been preserved, though I fear this will not remain the case. Losing this rating is not the be all and end all – adaptability is the name of the game – though it will be a bitter pill for the US to swallow. But why did this situation arise in the first place? The US has increased, altered or extended its debt ceiling seventy-eight times since 1960 and the measures to enact this increase had become so common place as to scarcely warrant notice. The difference on this occasion was that the Republicans and more specifically the Tea Party, voiced concerns over the scale of federal debt and spending; in my opinion quite rightly. The level of debt to foreign countries ($4.5 trillion) sparked particular concern, with $1.2 trillion owed just to China. Couple this with the ‘spend your way out’ policy which Obama has unsuccessfully poured billions of dollars into and one can certainly be appreciative of their alarm. The manner they went about achieving their aims was what you might call indecent for want of a better word.
It was a dangerous game for the Tea Party to be playing, seeking to gain political advantage essentially by creating an economic crisis. Though one could alternatively argue that that is what makes them more likely to succeed – a person with their back against the wall is more likely to agree to concessions. That said, it takes someone with scant scruples and brass balls to play games at such a late hour. Robert Zoellick, Chief Executive of World Bank, warned of the implications of the US not reaching a deal on its debt by Tuesday. The shockwaves would undoubtedly have been felt around the world, greatly over-shadowing Europe’s current concerns in Greece, Spain, Ireland and Italy. Domestically (in the US) the implications would have been severe at best, with interest rates soaring and financial markets plummeting.
Whilst there was concern that a decision would not be reached in time to avoid defaulting, this always seemed unlikely in reality – all parties were aware of the implications of such an event. However, even with the debt ceiling raised and cuts to be made, irrespective of what measures are finally taken, the future is hardly glistening. The prospects of the world economy are hardly looking much better. The US economic recovery is faltering, Spanish and Italian debt is an increasing concern and the elephant in the room is the Chinese economy – China has not controlled its levels of growth and there is the growing possibility of a future disaster waiting to happen – the figures released this week for the Chinese economy are not encouraging.
Apologies for sounding depressingly ominous, but it could well prove to be that the US effort to find a way around the crashed lorry of their national debt may only have staved off disaster temporarily as the world economy steers perilously close to a real disaster. This is of course merely speculation and there is every chance that everything could work out, but I feel it is going to take a far greater shake up of political and economic precedent than we have yet seen. In my opinion there has been too much emphasis laid on the individual to foot the bill. By this I do not mean to say that it was the banks and financial districts’ fault and we should therefore make them pay our way out or any other poorly conceived sentiment, popular though it may be. Such a notion is wholly impracticable. What I mean to say is that there has been too much emphasis put on high street spending, the sale of goods and the British manufacturing industry. Private debt levels coupled with the figures just published showing a fall in productivity for the first time in two years for British manufacturing demonstrate how unlikely a recovery even partially dependent on private spending is to succeed. Yes austerity measures are being implemented in this country for just about every area which the government pays in to, but crucially it isn’t getting us anywhere.
The US then has averted this politically induced crisis, but despite the media furore surrounding Capitol Hill this week, this was far from being the major economic crisis they would have us believe. As I have said, when push came to shove, I very much doubt the politicians would have allowed the country to default on its debts, whatever their ideological alignment. What should be of far greater concern in the US now is the stagnating economic recovery, unemployment figures of 9.2% and the increasing levels of poverty. This has implications for the rest of us of course, but of equal concern, the economic recovery appears to be struggling on a global scale. Much then remains to be done.