Budget Disarray: US Set to Restage Greek Tragedy

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The US has more in common with heavily indebted southern European countries than it might like to admit. And if the country doesn't reach agreement on deficit reduction measures soon, the similarities could become impossible to ignore. The fiscal cliff looms in the near future, and its not just the US that is under threat.

Congressional leaders in the US must reach agreement soon with the Obama administration on deficit reduction measures. Zoom
AP

Congressional leaders in the US must reach agreement soon with the Obama administration on deficit reduction measures.

The US has finally voted and the dark visions of America's future broadcast on television screens across the country -- and most intensively in battleground states -- have come to an end. Supporters of both Barack Obama and Mitt Romney had developed doomsday scenarios for what would happen if their candidate's opponent were to win. Four more years of Obama, the ads warned, would result in pure socialism. A Romney presidency would see the middle and lower classes brutally exploited.

But following Obama's re-election, Americans are now facing a different, much more real horror scenario: In just a few weeks time, thousands of children could be denied vaccinations, federally funded school programs could screech to a halt, adults may be forced to forego HIV tests and subsidized housing vouchers would dry up. Even the work of air-traffic controllers, the FBI, border officials and the military could be drastically curtailed.

That and more is looming just over the horizon according to the White House if the country is allowed to plunge off the "fiscal cliff" at the beginning of next year. Coined by Federal Reserve head Ben Bernanke, it refers to the vast array of cuts and tax increases which will automatically go into effect if Republicans and Democrats can't agree on measures to slash the US budget deficit.

In total, the cuts add up to $1.2 trillion over the next nine years, with half coming from the military and half from other government programs, and with $65 billion coming in the first year alone. They were enshrined in law with the Budget Control Act of 2011, which also increased the debt ceiling. And though a deadline of Jan. 2, 2013 was set, they were never meant to come into effect. The plan for deep across-the-board cuts was intended as a way to prod Democrats and Republicans into reaching agreement on a long-term plan to reduce America's vast budget deficit.

Not a Bad Thing?

The "fiscal cliff" also includes the expiration of tax cuts for the rich, which were originally passed by President George W. Bush and extended by Obama. The elimination of the lower tax rates would, according to the Congressional Budget Office, result in $221 billion in extra tax revenues in 2013 alone. A temporary 2-percent federal income tax cut would also expire, resulting in an additional $95 billion flowing into government coffers next year.

There are also several other cuts and tax hikes included in the austerity package. Some $18 billion in taxes would come due as part of Obama's health care reform, and welfare cuts would save $26 billion. Should lawmakers not reach agreement prior to the end of the year, the US budget deficit for 2013 would be cut almost in half, to $560 billion.

Which doesn't sound like a bad thing. After all, the US is staggering under a monumental pile of debt and could potentially begin to face the kinds of difficulties that have plunged several euro-zone countries into crisis. It is a viewpoint shared by the ratings agencies -- a year ago, Standard & Poor's withdrew America's top rating, justifying the measure by pointing to the unending battle over the debt ceiling. The agency noted that "the political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed."

From afar, it is difficult to argue; the ongoing battle between Democrats and Republicans in the face of a horrendously imbalanced budget looks catastrophically absurd. As their country heads toward the edge of the abyss, lawmakers preferred to debate whether or not French fries and pizza should be considered vegetables.

Still, a significant element in the dispute is a fundamental conflict that won't sound foreign to Europeans: How much austerity is too much?

Plunging Growth

As good as an instantaneous halving of the budget deficit might sound, the landing after a plunge off the fiscal cliff would be a hard one. Were taxes to be ratcheted up at the same time as state programs were slashed, it would have an enormous effect on the economy. According to the Congressional Budget Office, 2013 growth would immediately drop by four percentage points, making a recession unavoidable. The number of unemployed would be two million higher than without the cuts.

It is an eventuality that doesn't just put fear into the hearts of Americans. In its annual report on the US, the International Monetary Fund (IMF) referred to the fiscal cliff as the largest risk currently facing America. Investors have already reportedly become more cautious in the face of the looming cuts. Should politicians not agree to a credible plan for reducing US debt, it could ultimately harm the credibility of the dollar as a reserve currency. More immediately, the IMF writes in its World Economic Outlook report published in October, the drastic cuts "would inflict large spillovers on major US trading partners." In other words, an already fragile Europe would become even weaker.

As such, Germany won't be the only country watching closely as US Congress struggles to reach an agreement in coming weeks. Should the US economy radically slow down next year, "it could in the current atmosphere of uncertainty result in a global loss of confidence that would lead to a collapse in investment worldwide," according to the annual report of top German economic advisors released on Wednesday. Nevertheless, the experts warn, simply postponing measures to address the debt and budget deficit problems "would also have long-term costs in the form of still higher sovereign debt."

The Greek Model?

What, then, is the solution? In the end, the US could arrive at a compromise similar to the one that appears to be forming for Greece: austerity measures combined with more time to achieve budget deficit reduction targets. The drastic cuts currently looming are essentially a kind of debt brake, but it is one with no flexibility built in whatsoever. The US economist Denis Flower proposed in an interview with SPIEGEL ONLINE that Washington should introduce a law mandating long-term debt reduction, but which allows higher deficits in times of crisis.

US politicians, no doubt, would not be fond of hearing their country compared to Greece. After all, the heavily indebted euro-zone country was used during the presidential campaign as a caricature for the horrors of European-style socialism. But their current finances are not dissimilar, with one difference being that the US can't count on outside help as the Greeks have received.

It remains to be seen how US politicians choose to approach the problem. Republicans, having defended their majority in the House of Representatives, could simply let the country plunge off the cliff in the hopes that it would be blamed on Obama. Or, on the other hand, their willingness to compromise may have been increased by virtue of losing the presidential election badly. Republican Speaker of the House John Boehner on Wednesday pledged to work closely with the White House as negotiations begin. He said that lawmakers won't be able to solve the country's problems overnight, but said that voters "gave us a mandate to work together to do the best thing for our country."

Greece's economic problems and the resulting austerity packages it has passed have plunged the country into five straight years of recession. Germany, Europe and the world are hoping that the same fate is not in store for the US.

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1. The US is not Greece or Germany
jklfairwin 11/08/2012
Germany is in no position to be offering financial advice to the US. After exploiting southern Europe for its own benefit, Germany is now forcing a totally wrong-headed austerity on the losers instead of helping. Greece's biggest problem is the Euro. With its own currency, it would not have been such an easy mark for exploitation by the banksters and would have been able to devalue to solve its problem with much less disruption and misery than the Germans are forcing on it. The US has its own currency; a major difference. And we actually make the rich pay taxes , not nearly enough to be sure, but something that Greece is still not doing. The US economy, if necessary, could stand pretty much alone, something that Germany cannot say. Germany's wrong headed forced austerity will eventually take Germany down with it if it is not corrected.
2. Greece is different than the US......
LamontCranston 11/08/2012
The joke in Greece is that avoiding taxes is a national sport, and that is but one of the many reasons why they have such a serious budget issue. They need to get their "tax collection house" back working in order to begin to get back on a sound fiscal track. In America, the talk of letting the Bush Tax Cuts that were reinstated by President Obama in 2010 to negotiate and accomplish other policy issues with the Republicans are set to expire automatically at the end of the year. I believe that there will be a tax base increase as the President understands that the mandate of his election and public opinion of a fair tax plan is out there and will act accordingly so as to avoid such a fiscal alternative as what we see happening in Greece, and in other countries prior to the "Greek Tragedy". Fiscal austerity has been proven not to work as demonstrated by other instances of it's application with other countries in the past. America will not go down that path as our elected officials (many of whom still have some sanity left) understand, and have seen the results of such draconian economic actions, and are afraid of their political careers when they come up for re-election. We shall see, and hope we here in the U.S. do not fall for the same proven failures of prior austerity actions and unfair taxation policies that have the potential of such an outcome. We need to raise the taxes on those that can afford it, and have a fair and balanced tax code for all.
3. s
mae 11/08/2012
From reading your article one would neve guess that the latest figures show that the USA has overtaken Germany as the second largest exporter in the world. 1) China 2) USA 3) Germany http://en.wikipedia.org/wiki/List_of_countries_by_exports __________________________________________________________ American manufacturing is now number one again, surpassing China which overtook the USA a couple of years ago. "According to United Nations data, the U.S. is still the largest manufacturing country in the world." http://business.time.com/2011/03/10/can-china-compete-with-american-manu... US MANUFACTURING ON THE RISE http://www.joc.com/economy-watch/us-economy-news/us-manufacturing-rise_2... ____________________________________________________________ The USA is experiencing an oil and shale gas boom that is going to make the America more wealthier than ever as it become the largest energy producer in the world by 2020. “ Domestic oil output is the highest in eight years. The U.S. is producing so much natural gas that....This transformation could make the U.S. the world’s top energy producer by 2020." http://www.nytimes.com/2012/02/26/opinion/sunday/friedman-a-good-question.html?_r=0 _____________________________________________________ The world's largest manufacturing country, 2nd largest exporter in the world. Oil and Shale gas boom. Not exactly Greece is it?
4. mr
donlast 11/09/2012
I am always puzzled by many of the commentaries on the debt crisis and the so-called "austerity" responses that are being pursued as if these responses were a needless exercise in economic masochism. Simple back-of-the-envelope calculations will demonstrate the profound nature of the problem. Take America. The next four years of Obama will be bad. There is no question that this will be so. The figures are these. America's outstanding national debt is now in excess of the value of its economy's annual output of $16 trillion. It has risen 30% over the last five years. This means that some $4 trillion of the rise in US GDP - or annual income - over the last five years has been on credit, not from the basic earning power of the economy. It has been borrowing from the future to maintain current living standards. What does this imply. Well, it means that if America stops the nation's debt from rising so will living standards of the citizens cease to rise. To stop debt rising it has to eliminate the annual deficit of $1 trillion which is equal to 6% of the $16 trillion a year output of the economy. But if it eliminates the $1 trillion by cuts in public spending and higher taxes American living standards immediately fall by 6%. If it does not eliminate it the debt goes on rising and America is now into the end game where it starts issuing new debt to meet interest payments on outstanding debt. How long, pray, can this go on? The country is on a treadmill which it cannot get off. All it can do is pray for growth which isn't going to occur because those who are most instrumental in achieving growth - that is the private sector - are perfectly well aware of the sword of damocles hanging over their heads. Such is the cancer of national debt when it exceeds the capacity of an economy to either repay or service its debt.
5. The Greeks cannot print money as USA does…
titus_norberto 11/09/2012
The Greeks cannot print money as USA does… The fact that USA can print money is a benediction, or perhaps a course. We are all thanking God that the Drachma is not an international currency as it was at the time of the Pericles in Athens, the problem is that since the American default of 1971 perpetrated by the dynamic duo Kissinger-Nixon (in this order) when they nearly killed De Gaulle from a heart attack (see The Western Monetary Sin, by Jaques Rueff) when they UNILATERALLY decided to dishonour the US dollar convertibility into GOLD as established in the Breton Woods agreement at the end of WW II. The fact that the Athenian owls are not staring at US these days, that does not mean that we are out of trouble. In fact II do believe that the current financial collapse is due to the fact that there is NO CURRENCY. US dollar is FIAT (not a car) MONEY ! It worth what the government printing it SAYS it worth… If there is something so close to a worldwide government this is it, we have international contracts denominated in US dollars, we have debt denominated in US dollars, BUT we cannot print US dollars, not even (in theory) US government can… but only Benjamin Bernanke at the FED… Let US imagine if there is INFLATION in US dollars, what will happen ? First of all, US debt will diminish in the same proportion ! What will happen with the market value of assets ? It would be real chaos, nations will return to bartering. Now, what stops USA to depreciate the currency ? Nothing, in fact are printing at full speed, the only counter to inflation is to artificially stimulate the demand for US dollars. Printing money is magic, it fixes the Twin Deficit dilemma (helps paying the budget deficit making US products cheaper at the same time, is like making gold from lead…). Well, in my view is like the person falling from a 20th floor when he is about the 3rd he says: “up til now I am OK !”. Another advantage for the USA in debasing the currency is to become more competitive… Thus, I do not see any reason why USA will not follow that path. The problem is that we have no other currency to use as a comparison. There are none ! The Australian dollar increases its value but there are no enough dollars for the whole planet, the Euro is in tatters, the renmimbi is pegged to the US dollar (reducing the size of the debt is not a good incentive for China…), there is nothing left, thus we have the IMPRESSION that THERE IS NO INFLATION, but that is as deceiving as someone sitting in a stationary train seen another in movement thinking that he is moving as well… Yes, there is INVISIBLE inflation accumulating fueled by: 1- FED’s printing without restraint and backing in real assets, only DEBT; and 2-artificially LOW INTEREST RATES. If there is no credit (apart for credit offered to rich financially troubled nations such as Spain) the interest rate should be reflecting this fact, but it does not. Thus, we have no credit, low interest rates, uncontrolled emission, hidden inflation, recession, so lest US call a spade a spade, we are at the verge of STAGFLATION. To be honest, I really miss the ancient silver Drachmas sporting the clever owl… Reality, as usual, is far more fantastic than fiction. Norberto
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