US suffers an emotional downgrade
Published:Friday | August 5, 2011 | 12:00 AM
World financial markets are still reverberating from the suicidal political showdown in Washington last week over the raising of the US debt ceiling which, for the first time, was tied to budget cuts - a demand by ideological purists of the Republican Party.
Stock markets sunk for eight consecutive days and the US dollar took a pounding, reflecting the mood among investors that the United States has suffered an emotional downgrade.
More important, there is a growing realisation that even if the ratings agencies have been appeased by the deal worked out at the eleventh hour and will retain America's AAA credit rating, the US economy is stalling.
Recent economic data revealed that GDP growth is minimal, job creation has fallen dramatically, and consumer and business confidence indices have declined.
With consumers putting the brake on spending, it is difficult to see how the American economic engine will regain momentum without further stimulus measures.
Yet, at this critical juncture the political-economic-conundrum in Washington has placed the Obama administration in a fiscal straightjacket that could push it back into recession.
The muddle in US policymaking derives in large measure from the success that ideological purists of the Republican Party have had in casting America's economic predicament as that of a budget and debt crisis caused by ravenous spending.
Misdiagnosis
Their mantra since the party's landslide victory in last year's Congressional elections has been 'cut, cap and balance' and 'rolling back of government' as the solution to the US budget and economic problems.
But therein lies a fundamental misconception or misdiagnosis of the problem.
The fact is that the big jump in America's fiscal deficit has been driven by the deep decline in US government revenue brought about by the Great Recession.
Indeed, projections by the Congressional Budget Office are that, as a share of GDP, US government revenue are now running at about 14.8 per cent, the lowest level since 1950.
This compares with the average of 18 per cent since 1970. Spending cuts cannot make up this gap. They would compound the problem by further curtailing consumer demand, thereby squeezing GDP growth.
Rather than a budget and debt problem, America's immediate crisis is a jobs deficit. With nearly 14 million people out of work, private consumption, which accounts for two-thirds of America's GDP has been curbed.
As consumers hold down their spending because of uncertainty in the job market, demand for goods and services is restrained which, in turn, discourages hiring and investment by businesses.
Reversing the jobs deficit, therefore, requires fiscal measures to stimulate private-sector consumption and investment - not the fiscal tightening that the ideological purists of the 'Tea Party' are demanding.
The chances are that, emboldened by their leverage in the Republican Congressional caucus, these ideological purists are going to be even more aggressive in coming months as the election campaign season heats up. That means any stimulative measures will be stoutly resisted, including the extension of payroll tax cuts which Republicans had supported last year.
The highway spending programme which is now due as part of the normal planning cycle, as well as the proposed infrastructure investment bank, all of which would stimulate job creation and economic growth, could be stalled.
This would be the wrong course not only for the US economy but for the world. The possibility of stalemate in Washington has heightened concerns about a double-dip recession and made relevant the words of Sir Winston Churchill of us being able to "always count on Americans to do the right thing - after they've tried everything else."