Crisis in the United States, Global Risk

Bad news for the whole world comes from Washington once again. The recovery of the world’s largest economy, the U.S., will be slower and bumpier than what it would have been had politicians come to an agreement on a fiscal adjustment (deficit reduction) plan for the coming 10 years. Concern with the 2012 elections prevailed yet again, and the Republican opposition decided it was more important to create problems for Barack Obama than to support job creation. Other bad news was announced Tuesday morning: The Gross Domestic Product (GDP), the sum of final goods and services generated by the economy in a given period, grew in the third trimester at a rate equivalent to 2 percent per year. Previously the numbers released had predicted an expansion of 2.5 percent. In review, the growth of consumer spending rose from 2.4 percent, estimated initially to be 2.3 percent.

The still-high indebtedness of families and an unemployment rate above 9 percent continue to dampen consumption. The Federal Reserve (the Fed, the central bank of the United States) keeps basic interest rates between zero and 0.25 percent, hoping to stimulate lending by the banks, but without significant result. Consumers are not seeking more loans nor are businesses excited to invest, faced with the prospect of low growth of businesses.

Americans have to cut $2.2 trillion from the national debt in 10 years to keep control of a debt of about $15 trillion, approximately equal to the total value of one year’s production. A cut of $1.2 trillion was to have been decided by this Monday by the bipartisan super committee, but the failure of the negotiation was officially recognized two days ago.

To make the fiscal adjustment less painful, the president proposed the reduction of tax benefits given to very rich taxpayers.* Some of them, starting with multibillionaire Warren Buffett, publicly support Obama’s proposal. Buffett stated he paid much less in tax proportionally than his secretaries and defended a more equitable tax rate.

The initiative of these billionaires failed, because there was not an agreement between the members of the super committee. The Democrats defended an early end to the aforementioned tax benefits, now scheduled to expire in December of 2012. The opposition rejected this, but, in return, had their own spending cuts proposal combined with a tax reform turned down by the Democrats.

On balance, Republican resistance has been the major obstacle to the execution of a less painful and socially more equitable fiscal adjustment. Before the super committee’s failure, the opposition had already nixed a stimulus package of $447 billion presented to the Congress by Barack Obama.

The government, in spite of strong Republican resistance, maintains some space for action. In August, it managed to raise the debt ceiling and will not need to revisit this issue before the election of the following year. Also, a cut of $1 trillion from the public debt has already been outlined. Besides, the August agreement created an alternative in case of the failure of the super committee. From January 2013, an automatic cut of $1.2 trillion will be made, divided equally between health and defense spending.**

Oppositionists have already stated their intention to pass a law eliminating this commitment. However, President Obama promised to veto any project of this type.

The impasse in the United States and the prolonged crises of sovereign debt in Europe will make returning to growth very hard for the rich world in the coming year. Also, in Europe, the economies up to now in the best condition, such as Germany and France, have lost impetus and are giving signals of stagnation. Perhaps the change of governments in Italy and Spain will facilitate fiscal adjustment and hasten the recovery of economic activity in those two countries, but that also is not guaranteed.

The emerging economies have been principal engines of global growth, but they also will likely grow less. If this happens, countries like Brazil will have more difficulties limiting the effects of the crisis.

*Translator’s Note: This refers to the Bush-era tax cuts for the wealthy.

**Translator’s Note: The scheduled automatic cuts are to be divided between domestic (not strictly health) and defense spending.