♠ Posted by Emmanuel in Americana,Cheneynomics
at 8/02/2011 12:05:00 AM
I have saved myself from wasting tremendous amounts of time and effort blogging about the US lifting its $14.3 trillion debt limit which was set to be reached on August 2. Alike any other junkie unable to go cold turkey, the US cannot resist another fix. So, it was inevitable that, pretensions to the contrary, its unprecedented debt accumulation would go on. The important takeaway is that nothing has substantially changed and indeed matters may have gotten worse. Having spent time more productively clipping toenails and suchlike, let me just raise a few points here to flesh out this belief:
1. There are no effectively new tax increases - it remains especially unclear to me why, having produced no tangible improvements to the economic well-being of their country during the BushBama era to date, handicapping revenue generation has become sacrosanct. Anyway, it is highly unlikely that simplifying and streamlining the tax code can substantially close America's fiscal gap. That is, efficiency gains alone have seldom solved structurally--how should I put it--subprime rates of revenue collection against GDP. In going toe-to-toe with the deficit monster (of its own creation), America is handicapping itself by using only one hand and tying the other.
2. Speaking of which, there is "strategic ambivalence" on the Bush tax cuts - the president believes the so-called Bush tax cuts will expire as scheduled. However, his Republican counterparts argue that they will be extended under the deal. Certainly, the ambiguous status of the Bush tax cuts helped appease both sides in the voting process--but it only kicks the can of this important budgetary battle a few months down the road. Again, there is no improvement.
3. Growth is slowing Stateside - projected savings from the 2011 Budget Control Act are in turn based on adjustments to the CBO's 2011 Long Term Budget Outlook. In a flight of fancy or whatever its equivalent is in bean counter's terms, the CBO actually raised its GDP growth projections over the coming years instead of lowering them. From p. 74:
Projections of GDP growth are slightly higher. In this year’s analysis, real (inflation-adjusted) GDP is projected to grow at an average rate of 2.2 percent a year over the long term, compared with the 2.0 percent rate projected last year. That increase has two main causes. First, CBO has raised its long-term projection of immigration, which implies faster growth in the labor force. Second, CBO has increased its projection of how fast the capital stock will grow over the long run, because it now assumes that the prices of capital goods will grow more slowly than assumed in the 2010 report.While 2.2% annual growth going forward is definitely "below trend" as far as the US goes of about three percent historically, recent economic figures suggest even this relaxed target may be too optimistic. American growth in the first half of the year was below a measly 1%, and recent economic data has been uniformly unpromising. Certainly, a few negative quarters look likely in the near future, further denting the government's already self-impaired capacity to generate revenue (see points 1 and 2). Moreover, I am doubtful about the argument that a larger labour force necessarily translates to faster growth. After all, if many are unemployed, then the "automatic stabilizers" that need to kick in are concomitantly larger with more on the dole. As for slowing inflation lowering the price of capital goods, it does not necessarily translate into a greater willingness of American companies to invest at home.
4. If not in the next few months, a downgrade from AAA is inevitable on current trends - in This Time Is Different, Reinhart and Rogoff highlight that national debt loads over 90% of GDP impair growth. (Note to CBO: R&R suggest a 1% decline in the median growth rate upon achieving this threshold, suggesting US growth projections of 2.0% in the most optimistic scenario. It's rather worse if you only extrapolate from recent years.) Remember too that S&P was advocating cuts in the neighbourhood of $4 trillion for the US to retain the triple A.
The US having since surpassed the 90% mark, the only thing this "budget cuts without substantial revenue increases" legislation does is ever-so-slightly slow the American trajectory towards 200% national debt to GDP mark. The seemingly inevitable massive debt overhang not only impairs economic growth necessary to help fulfil obligations but also does not assuage creditors increasingly antsy about America's dire fiscal situation. While usually tardy about downgrades, even credit rating agencies eventually wise up out of shame of doing wrong a la the securitized products debacle.
5. Hastily assembled, this bill may spawn a political backlash from public sector employees in due course - here in Britain, we've had mail workers, transportation workers, educators, and all sorts of public sector workers striking over previously signalled changes to retirement age, pensions, and the inevitable redundancies. In due course, these too will hit their American counterparts, However, the difference is that many such measures Stateside which were approved of in a rush have the potential to translate into an even worse backlash. Surprise!? Watch out for it, and haste sometimes makes waste. Given that government has supplied a comparatively larger share of employment than the private sector in recent years, this consideration is not a minor one.
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So why haven't I blogged about this shameful spectacle much? Because nothing much has changed, really. As the post title says, it's like rearranging the debt chairs [sic] on the Titanic as America's leaders further compromise their ability to steer this hapless vessel away from its date with an iceberg. You're going down, Sammy, and I for one don't want to be aboard.
UPDATE 1: US stock markets are still plunging today. It's not a vote of confidence by any means. I fully expect lacklustre growth to dent revenue collection and worsen safety net outlays. Both undermine whatever misplaced confidence remains in America.
UPDATE 2: With the deal ignoring the largest outlays to come by ignoring entitlement reform (Social Security, Medicare, Medicaid), it's all rather pointless isn't it?
