Now the US joins the fray

by John Rapley

Okay, so we've had a few weeks of bad crisis management in Europe, at the end of which even German bonds are starting to sell at a premium. We need a government, somewhere, to show it has resolve and a coherent plan for preventing the next financial crisis from going global. Might the United States step up to the plate?

Not if last week's events are anything to go by. Late last Monday, the supercommittee drafted to come up with a debt-reduction plan for the US announced it had failed. The next day, the Commerce Department revealed that third-quarter GDP growth was slower than initially reported. Put it all together and the conclusion to be drawn is clear: at the very time the US needs strong leadership to forestall a return to recession, nobody is stepping up to the plate.

It is a measure of the sorry state of American politics today that even before the supercommittee's announcement, committee members from both sides of the political aisle had taken to the Sunday talk shows to blame one another. There appears to be little adult supervision of the US Congress. Those who might be trying to look cool, like President Obama, instead just looked detached.

It's been said so often it hardly bears repeating, but what the US needs is a short-term rise in spending, accompanied by long-term reductions. Instead, what Americans will get is the opposite. At least, with the automatic trigger that the White House and Congressional leaders had agreed before drafting the supercommittee, European-style panic will likely be averted. In the event the committee failed, deep cuts in spending will automatically kick in from 2013.

Incentive to negotiate

Curiously, while many Republicans refused to contemplate tax rises, helping to force the committee's failure, they may have inadvertently shifted the advantage to the Democrats. The trigger will bring about steep cuts in the Pentagon budget, which most Republicans won't like. Meanwhile, Democrats' cherished social programmes, Medicare and Social Security, will escape this budget-cutting.

Both sides have an incentive to negotiate a solution. But arguably, the incentive is now stronger for Republicans. Sadly, though, in the short term, the economy needs further support, and is now less likely to get it. And while early polls suggest that Obama has a slight advantage over Republicans in the contest of who's at fault in the current impasse, neither side comes out looking good. Meanwhile, a further slowdown will make Obama's re-election prospects more difficult than ever.

Some Republican strategists are prepared to go for broke. Stonewalling through next year's election is, to them, an option. Current polls give them a not unreasonable chance of taking both Houses of Congress, with an outside chance at the presidency as well. If they were to pull that off, they could then bring about the kind of deep and long-standing reductions in federal spending that they have long sought.

But it's pretty high-stakes poker. Congressional approval ratings are approaching zero, and have worsened this year, suggesting discontent with Republican intransigence. And it's possible that Obama's withdrawal from the previous set of negotiations will enable him to step back into the fray as the adult everyone longs for.

Possible, but a lot to hope for. How next year's elections go is, at this point, difficult to predict. And while Republicans might sweep Congress, Obama might yet pull of a coup of his own. In that case, long-term federal spending might conceivably rise, as the country's social programmes need more funding to support an ageing population. The Republican bet could backfire.

In the country's politics, between now and then, much could happen. But in the economy, the prospects appear less uncertain. The US economy looks likely to slow down next year. This will benefit hardly anyone.

John Rapley is a research associate at the International Growth Centre, London School of Economics and Political Science. Email feedback to columns@gleanerjm.com and rapley.john@gmail.com.