The Threat of the Tea Party

In his column for Radio Nova, Guillaume Duval explains that the massive budget cuts in the United States, demanded by the Republican-majority Congress, constitute a threat to global economic recovery.

Last Friday, the Obama administration and the Republican majority in the U.S. House of Representatives reached a last minute agreement to avoid a “shut-down,” or the closing of many U.S. federal services. However, it was only the postponement of a war which concerns not just the Americans.

Yes. The stakes of the internal budgetary battle in the United States is enormous, not only for the Americans but also for the entire world economy. What is at stake? Just last January, the U.S. House of Representatives was dominated by the Democrats, but they were unable to vote in a definitive budget for the 2011 fiscal year (October 1, 2010-Septembet 30, 2011) before the session closed. In order to balance the last months of the year, Barack Obama was compelled to negotiate with the newly-arrived Republican majority in the House of Representatives, which is currently dominated by tea party extremists.

The tea party was elected on the promise of drastic budgetary cuts.

Indeed, and that is why the negotiations were very difficult and uncertain until the very end. Ultimately, an agreement was reached that included budgetary cuts of $38 billion, or about 0.3 percent of the American gross domestic product (GDP). But this is only a first step, and the next battle is already taking shape: The U.S. Congress regularly authorizes the federal government to take on debts up to a certain limit. The upper limit will be reached next May 16. So Obama will have to renegotiate with the Republicans before then in order to receive authorization to take on more debt. And the Republicans are planning to insist upon even bigger budget cuts at that time.

Okay, but why is this fight so important, and what does it have to do with us?

Because, so far, one of the main differences between Europe and the United States was that, so long as unemployment rates remained elevated, American government officials spared no expense in supporting economic activity and in kick-starting the economy. As a result, the Americans always recovered from crises much more rapidly than the Europeans. In mid-2007, American households and companies were taking on debt at the rate of $2.5 trillion every year. Currently, debt is around zero and, considering the level of indebtedness of American households, this ought to continue for a while. In other words, $2.5 trillion is missing in order for the American economy to be able to function as it did four years ago.

That’s huge, yet the American economy is picking up again.

Yes, because up until now, the federal government has been taking on debts of up to $1.5 trillion, which compensated for a large part of that hole, coupled with massive injections of liquidity into the Federal Reserve. If the government must stop doing so — and in significant proportions — economic activity in the United States has every chance of falling off again. Since China has already reached the limits of its capacity and Europe cannot be counted on — bogged down as it is with the crisis of the euro — the entire world economy is, thus, in danger of falling off again. The tea party threatens not only to endanger the U.S. economy, but the entire world’s.