In the interest of national security, and the preservation of the world order the United States has upheld and benefited from since World War II, Republicans and Democrats must make the necessary compromises and agree on a deal to address the nation’s fiscal crisis in both the near and the long term.
I am not an economist or a budget analyst, so I don’t presume to know exactly what a “grand bargain” should look like. It seems pretty obvious that a compromise will require both tax reform, including if necessary some tax increases, and entitlement reform, since those programs are the biggest driver of the fiscal crisis. What I do know, as a national security analyst, is that our continuing failure to address the crisis in a way that makes possible a return to stable economic growth has become a serious foreign policy problem.
In a world that still looks to U.S. leadership on many issues, despite what some say, our utter dysfunction on matters involving the basic health of our economy does not inspire confidence. Nor will the United States act with confidence abroad while we are unable to address our problems at home. It is no accident that all the misguided talk of a “post-American world” came after the financial crisis exploded.
A principal victim in the absence of a deal to address the fiscal crisis has been and will continue to be the national security budget. Republicans and Democrats alike have been prepared to see hundreds of billions of dollars cut from the defense budget, with even more cuts coming if Congress fails to avoid the automatic “sequestration.” The already shrunken foreign-aid budget is also being cut at a time when, in the Middle East, for instance, we need to be spending more, not less, to support stable economies as the basis for democratic reform.
THE fiscal crisis across Europe puts even America’s problems in the shade. We are truly ‘on the edge’, writes Bill Jamieson.
Never underestimate the capacity of the eurozone to upstage America when it comes to fiscal crisis. Barely had the graciously bipartisan post-result speeches been delivered than the fine words were lost in a torrent of commentary about the approaching US “fiscal cliff”.
But it is more likely to be the eurozone, not the United States, that will wobble on an even more precarious fiscal cliff in the coming weeks.
Over the past month troubling economic data has emerged from the single currency area. As if following the well-rehearsed practice of picking a good day to bury bad news, the European Commission let slip yesterday, while all eyes were turned to America, sharply downgraded forecasts for the EU and the eurozone. These figures had a bigger negative effect on markets than the pressing problems of America’s budget deficit post the Obama triumph.
The eurozone crisis displays every sign of being about to re-erupt.
The euro-area jobless rate climbed to a record in September as the fiscal crisis and tougher austerity measures threatened to deepen the economy’s slump.
Unemployment in the 17-nation region rose to 11.6 percent from 11.5 percent in August, the European Union’s statistics office in Luxembourg said today. That’s the highest since the data series started in 1995. The data also showed that youth unemployment is at 23.3 percent, with Spain’s rate more than double that, at 54.2 percent. A separate report showed inflation cooled to 2.5 percent in October from 2.6 percent.
The debt crisis has pushed at least five euro nations into recessions and eroded investor and business confidence, forcing companies to cut costs to help weather the turmoil. Economic confidence in the region fell in October, according to a report yesterday, while data today French consumer spending rose less than economists forecast in September.
“We’ve become more pessimistic,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “The euro-area economy will probably only return to growth in the second quarter of 2013. The situation on the labor market will continue to worsen, with the jobless rate increasing to 12 percent.”
The fiscal crisis for states will persist long after the economy rebounds as states confront financial problems that include rising health care costs, underfunded pensions, ignored infrastructure needs, eroding revenues and expected federal budget cuts, according to a report issued here Tuesday by a task force of respected budget experts.
The severity of the long-term problems facing states is often masked by lax state budget laws and opaque accounting practices, according to the report, an independent analysis of six states released by a group calling itself the State Budget Crisis Task Force. The report said that the financial collapse of 2008, which caused the most serious fiscal crisis for states since the Great Depression, exposed a number of deep-set financial challenges that will grow worse if no action is taken by national policy makers.
“The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened,” warned the two chairmen of the task force, Richard Ravitch, the former lieutenant governor of New York, and Paul A. Volcker, the former chairman of the Federal Reserve.
The report added a strong dose of fiscal pessimism just as many states have seen their immediate budget pressures ease for the first time in years. It also called into question how states will be able to restore the services and jobs that they cut during the downturn, saying that the loss of jobs in prisons, hospitals, courts and agencies had been more severe than in any of the past nine recessions. “This is a fundamental shift in the way governments have responded to recessions and appears to signal a willingness to ‘unbuild’ state government in a way that has not been done before,” the report said, noting that court systems had cut their hours in more than a dozen states, delaying actions including divorce settlements and criminal trials.
Three of the country’s most prominent minds on U.S. budgetary problems issued a stark warning to lawmakers today as Congress approaches what many have called a “fiscal cliff” of tax hikes and spending cuts that are set to take effect Jan. 1.
Erskine Bowles, who served as President Clinton’s chief of staff, former Sen. Alan Simpson and billionaire investor Warren Buffet all expressed pessimism as to whether Congress and President Obama could reach a compromise to reduce the debt and avoid another fiscal crisis, during an interview with CNBC Thursday morning.
While both Republicans and Democrats have said they do not want to let all the tax cuts expire and plan to stave off the bulk of the spending cuts, Bowles said partisan politics would likely thwart any deal to avoid the looming taxmageddon.
“I think if I had to tell you the probability, I’d say the chances are we are going over the fiscal cliff,” Bowles said. “I hate to say it, but I think that’s probably right.”
Bowles, whom Obama appointed, along with Simpson, to create a bipartisan debt-reduction plan, said today that because debt reduction was “politically painful” and “really tough,” it was not likely Congress and the president would make the tough choices to reform entitlements, cut spending and simplify the tax code, as the Bowles-Simpson plan suggests.
Billionaire George Soros warned on Monday that the euro crisis is growing deeper, tearing at the fabric of European Union cohesion, because policymakers are prescribing the wrong remedies.
“I’m afraid that the euro crisis is getting worse. It’s not over yet, and it is going in the wrong direction,” Soros said in discussion with Denmark’s economics minister hosted by the daily newspaper Politiken.
“The euro is undermining the political cohesion of the European Union, and if it continues like that could even destroy the European Union,” Soros said. “That is due to a misunderstanding of what the problem is.”
Soros, the Hungarian born U.S. investor, said that the creators of the single European currency believed that imbalances were created in the public sector without understanding that markets themselves can create imbalances.
He said the euro crisis is being dealt with by policymakers as a fiscal crisis though the crisis began as a collapse of the banking system in the United States and was compounded by a divergence of competitiveness among European countries.
He said that failure to deal with the crisis was creating tremendous tensions because people, who see that policy is failing, are driven into anti-European positions and dissent is growing within and between the countries of Europe.
The World Bank cut its global growth forecast by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown in emerging markets such as India and Mexico.
The Washington-based institution said the world economy this year will grow 2.5 percent, down from a June estimate of 3.6 percent. The World Bank sees the euro area contracting 0.3 percent in 2012, compared with a previous estimate of 1.8 percent growth. The U.S. outlook was cut to an expansion of 2.2 percent from 2.9 percent.
“Even achieving these much weaker outturns is very uncertain,” the World Bank said in its Global Economic Prospects report released today. “The downturn in Europe and weaker growth in developing countries raises the risk that the two developments reinforce one another, resulting in an even weaker outcome.”
The World Bank urged developing economies to “prepare for the worst” as it sees a continued risk for the European turmoil to turn into a global financial crisis reminiscent of 2008. Euro-area industrial production declined for a third straight month in November, a report last week showed, adding to signs the economy failed to expand in the fourth quarter as leaders struggled to quell the region’s fiscal crisis.
The revision is the largest since January 2009, when the World Bank cut its global estimate for that year by 2.1 percentage points. The World Bank sees a global expansion of 3.1 percent in 2013, 0.5 percentage point lower than previously forecast.