Monday, December 24, 2012

The US "Fiscal Paraglide"


First off, Merry Christmas to all the readers of my blog, and may you also have a Happy, Healthy and Prosperous New Year!

I am currently out in the middle of Indian Ocean (just sailing towards Madagascar passed Reunion Island an hour ago) this Christmas Eve night, having spent a wonderful 3 days on the island of Mauritius.  While cruising the south Indian Ocean I have been reading the New York Times on virtually a daily basis and have been mesmorized by all the drama that unfolded in Washington DC over the past week or so connected with the so-called “fiscal cliff”.  So as there is only a week remaining to do anything about the approaching 
sequester that will happen after January 1st, I thought it probably time to say something about it.

My immediate reaction to reading the news was to think “oh no, so if the US Senate democrats will not propose anything unless the Senate Republican leadership in the shape of Mitch McConnell undertake not to filibuster the measure put forward, how will that work, given that the Republicans just don’t seem to be able to unite their disparate factions?”  I think that we indeed are about to go over to the so-called “fiscal cliff”, and it is now likely that taxes will go up and that spending will be cut over the next few years. 
But then I started to think about this a little more deeply and I realized that there are a few things that are really important here from both an economic and a political point of view; first, US debt has already been downgraded over the difficulty in finding agreement over raising the debt limit - which caused the US to be in the situation that it is now in – and the world didn’t end; second, that the “fiscal cliff” will really not be a cliff but will act more like a “fiscal paraglide”; and third, that we are currently witnessing the end of the Republican party as we know it, and therefore a completely fractured political structure that will not lead to agreements on economics for many years to come. 

Let’s deal with each issue in turn.  First, the actual economic measures in the fiscal cliff and the size of the US national debt are not the most important issues – economic growth is.  The real issue is how does the US maintain the impetus behind US economic growth, and clearly tax hikes and spending cuts will not help, but these tax hikes and spending cuts are not exactly as draconian as those already implemented in the UK, and yet the UK has managed to totter on with anemic rates of economic growth despite the fact that further cuts were recently announced. What I’m really trying to say is that this is not a question of action, it is a question of timing.  The UK adopted fiscal austerity with increases in sales taxes and quite drastic reductions in spending just as the country was coming out of recession, which led to a “double dip” recession.  The timing in the UK was all wrong.  So the question is, given where the US is right now, can it withstand some small tax increases and cuts to military and some social programs right now, or is the economy already sputtering or heading into a private sector downturn?  I would argue that the US economy is now resilient enough to withstand some corrective fiscal action, particularly as even if President Obama manages to get a so-called “stripped down” bill agreed upon which leaves taxes for all but the wealthy where they currently are, the country will once again face raising the debt ceiling again in late February or March.  Also the Fed is still maintaining and in fact expanding what is already an extremely expansionary monetary policy that is tied to the labor market, so given that the housing market is definitely on a track to recovery, some corrective action to taxes and spending should not derail economic recovery like it did the UK.

In fact I believe that US economic growth impetus right now is being somewhat underestimated, so that if there is enough “upwind” to growth, the increase in taxes and the cuts to spending could restore some confidence that the country is once getting back on track with its fiscal policy and therefore (using a “paraglide” analogy), falling off the cliff might only at worst provide one quarter of negative growth followed by a strong cyclical upswing.

Last point – the Republican Party.  What has been distressing to watch in all this drama in Washington DC is that our politicians just don’t seem to be able to bridge their gaps anymore on fiscal policy, partly because the Republican Party appears so divided on what compromise (if any) is feasible ( - thanks mostly to Grover Norquist).  So if these gaps in fiscal policy cannot be bridged, we need a new mechanism to deal with fiscal policy-making in the largest economy in the world.  If the debt ceilings are maintained, then are we really going to impose periodic sequesters?  If debt ceilings are scrapped, what constraints should US fiscal policy have? 

More on this next time!

1 comment:

  1. This was a very good read, Dr. Crowley. It was refreshing - maybe even relieving - to hear your point about it being more of a "paraglide." The actions of the cliff did strike me as reasonable, but they seemed rather abrupt as opposed to a gradual tapering-off. It seems like few politicians have been referencing the early (hasty?) austerity experiments all around Europe, which serve as convenient cautionary tales with immediacy and relevancy to what we've been facing here in the US. You couldn't have done a better job of making the point about needing to get the timing right.

    The Republican party is becoming horribly fractured. As Tea Party and neoconservative types continue to exile traditional conservatives and moderate Republicans, I think the party will become less fractured after an exodus of former moderates who will likely go independent under a third party (or perhaps unaffiliated), or join the Democratic party. I can only imagine such polarization will lead to intense brinkmanship and political deadlock.

    If there is to be a new mechanism for fiscal policy, I think it's perhaps best if we avoid creating further degrees of separation between fiscal policy and voters. Perhaps more routine/short-term fiscal functions should be moved exclusively under the purview of the executive branch (perhaps even under a non-departmental independent Fed-like entity), leaving extraordinary and long-term fiscal decisions to congress.

    As it stands now, I will be one of countless employees of federal grant-funded programs to not have a job as of January 2 due to the immediate halt in funds disbursements from the automatic cuts. It's possible however, that if a deal were reached after January 1, perhaps by late February as Warren Buffet estimates, that it will amount to only a month or so off. I would very much like fiscal responsibility in the US, but it's unnerving and frustrating that it should bludgeon the citizenry so suddenly when the poisonous fiscal problems we're dealing with were allowed 8+ years to be forced upon us by an uneducated leadership installed by a misinformed electorate. So I am really hoping, deal or no-deal, that it will be a paraglide as you've suggested.

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