The United States faces an ugly combination: Japanese-style economic stagnation plus Italian-style political paralysis.
The U.S. remains far from full recovery from the financial crisis of 2008. A new survey by Rutgers University finds that 23% of Americans have lost a job (whether full-time or part-time) at some point in the past four years. Another 11% report a job loss by a member of their immediate family.
There are 12.3 million unemployed Americans today, and that number would be even higher if we counted those who have quit searching for work.
Yet while most Americans struggle with economic hardship, the American political elite engages in high-risk political games that put at risk not only the U.S. economy, but global security.
The United States is heading for its third artificial fiscal crisis in as many months.
The first artificial crisis was the so-called “fiscal cliff”: the expiry of many tax cuts at the end of 2012. The second artificial crisis was the debt ceiling: the U.S. government bumping against its borrowing limit this month. The third crisis is the looming “sequester”: a law passed in 2011 to mandate big, automatic spending cuts if the two parties cannot agree on a deficit-reduction package in March.
The first two crises were averted, more or less, by last-minute compromises. On the third crisis, the sequester, Republicans are vowing, “no concessions.” They are demanding that Barack Obama meet their terms in full: a budget for 2013 that contains only spending cuts, no additional tax revenues at all — or else they will allow the sequester ax to fall.
The sequester ax is sharp. It will cut government spending in the next fiscal year by 0.5% of GDP and continue to chop deeper and deeper over the decade ahead, until an alternative budget deal is reached. A half a point does not sound like much, until you remember that the U.S. economy is growing at a rate of barely 2%.
Half of all the sequester cuts will be taken from the Department of Defence, a department already scheduled for half a trillion dollars in cuts over the next decade. But unlike regular budget cuts, which can be carefully planned, the sequester (if it comes) will arrive abruptly, because nobody believed Congress would proceed with anything so stupid. That abruptness almost certainly guarantees the cuts will be inflicted not on the least deserving Pentagon programs, but on the programs that can be canceled fastest — a formula for chaos.
Economists in the room will note that the U.S. budget deficit already is shrinking at the fastest rate since the end of Second World War: According to the Congressional Budget Office, the U.S. budget deficit is on track to decline by 3.7 percentage points between fiscal 2010 and the end of fiscal 2013 — without any changes in current policy at all. That would be a steeper deficit reduction than occurred during the booming 1990s.