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Thursday, July 28, 2011

U.S. dances on debt cliff edge


Special to The Japan Times

Hong Kong — It was fascinating to watch U.S. President Barack Obama and House Speaker John Boehner make their appeals to the nation in television addresses over their deadlock about whether and how to raise the $14.3 trillion ceiling on U.S. debts before the country runs out of money next week.

British Prime Minister Winston Churchill, who knew America and Americans well, not least because his mother was one, famously said, "You can always count on Americans to do the right thing after they've tried everything else." Maybe he will be proved wrong.

Other commentators have seen the crisis as similar to a silent movie where a pretty girl is tied to the track in front of a steaming train, but you know that the hero will reach her and cut her free in the nick of time before the train arrives.

Main market-movers seem to be taking the view that all will be all right and that a deal will be cut. But in the real life of 2011, there are people — tea party Republicans notably — who don't mind the girl being sacrificed to teach a lesson, while the "heroes" are squabbling over which knife to use and where to cut the bonds and whether the television cameras are watching to record their heroism. "Heroes" has to be in quotation marks because there is nothing heroic in the behavior of the Republicans or of Obama.

Was this the man who promised "change you can believe in?"

The situation has serious repercussions far beyond the grave immediate issue of the U.S. debt ceiling and whether Washington will be able to pay its bills after Aug. 2. It involves the confidence of financial markets over the debt and credit rating of the world's biggest economy, whose treasuries are a benchmark for government and commercial debt markets throughout the world. It directly involves confidence in the dollar, still the world's reserve currency. It affects confidence and growth in the U.S., with potential tsunami effects right round the world.

This is more than an economic story. It is further evidence of a global political deficit, the inability of political leaders to think beyond narrow partisan interests. European leaders finally got their act together last week to reach a deal providing Greece with an improved bailout package and taking a large step towards fiscal federalism. But hold the back-slapping: The eurozone members will have to triple their €440 billion bailout fund if it is to cope with problems in bigger countries such as Italy and Spain.

In the U.S., the breakdown in civilized relationships between the White House and the Republican House of Representatives will have repercussions even if a deal is reached at the last minute. Boehner complained that "Dealing with the White House is like dealing with a bowl of jello."

Obama's concessions to the Republicans have angered his own Democrats, who claim that he has been weak, and the poor and underprivileged will have to pay the bill while the rich walk away unscathed by tax increases.

Boehner's final play will be to propose raising the debt ceiling by just $1 trillion, which would tide the U.S. over only to lead to another furious argument next year about a further rise, right in the heat of the presidential election campaign. This would be a recipe for further disaster, and why Obama has promised to veto it, if Boehner can get it passed over tea party opposition. Both sides, but particularly the Republican right, see the issue as a power play for control of the White House and Congress in next year's elections.

U.K. Cabinet minister Vince Cable said without regard for diplomatic niceties: "The irony of the situation is that the biggest threat to the world financial situation comes from a few rightwing nutters in the American Congress."

But leading Republicans self-righteously believe they have right on their side. Boehner told his troops, "If we stick together, we can win this for the American people."

Larry Summers, treasury secretary under President Bill Clinton and Obama's economic guru until recently, urged politicians to look at the real issue — the U.S. jobs deficit. He claimed that there was only a small chance of inflation and excessive borrowing, but a much greater one of a decade or more of stagnation.

"The right question to focus on is how to stimulate demand," said Summers. "Look out there. The treasury bond rate, treasury note rate for 10 years is 2.85 percent. Nobody is failing to invest because 2.85 percent is too much.

"They are failing to invest because there are no customers in their store. They are failing to invest because their factories are sitting empty. They are failing to innovate because they're not sure how large the market for the product will be.

"By the way, an extra percent a year on the growth rate for the next five years will do more for the budget than any amount of entitlement cutting that's under discussion."

Some big corporations are prospering, as strong second quarter earnings from Caterpillar, General Electric and McDonald's showed. U.S. unemployment is 9.2 percent, more than two years after economists declared the end of the recession. Wages and salaries accounted for a mere 1 percent of economic growth in the first 18 months after the formal end of recession, against 15 percent after the 2001 recession and 50 percent after the 1991-92 recession.

At the same time, corporate profits accounted for a whopping 88 percent of economic growth this time round, compared with 53 percent in the 2001 recession and zero after 1991-92.

The big difference is that U.S. companies have been increasingly expanding abroad while cutting jobs at home. In the decade from 2000, according to the U.S. commerce department, U.S.-headquartered multinationals added 2.4 million jobs overseas, but cut 2.9 million jobs at home.

China and Asia generally may feel smugly happy that their economies are chugging along nicely. But they will have a price to pay if the U.S. does not reach a deal. Squabbling in Washington makes leaders in Beijing look positively statesmanlike in the way they are coping with economic problems. But there is no evidence yet that China is ready to take the global high road as the U.S. falters.

News that Beijing is wriggling round sanctions on Iran by reverting to barter trade shows that China has a narrow view of its interests.

Kevin Rafferty is editor in chief of PlainWords Media, a consortium of journalists interested in issues of economic development.


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