Column : A cliff hanger

Written by Meghnad Desai | Updated: Nov 5 2012, 08:03am hrs
Hurricane Sandy permitting, on Tuesday November 6, there will be voting across the US to choose members of the Congress and the President of the US. Hopefully, the voter participation will be full and the postal votes already cast will not be overly decisive. An election campaign that started in a rather dull fashion has been ignited since Obamas failure to sparkle at the first debate. Now every little shortfall in economic numbers looks menacingly large. Every idiosyncrasy in Obamas style grates. It looks like the election is going to the wire and who knows who will be taking the oath on January 22, 2013.

Yet this does not really matter as far as the most serious problem facing the US is concerned. This is the budgetary problem. It is more the results of the Congressional elections that matter in this respect and not the identity of the winner in the Presidential election. In that respect, the present state of the two Houses is unlikely to change. The Democrats will continue to command a majority in the Senate, barring a landslide for the Republicans, which does not look very likely. The House of Representatives will continue to be controlled by the Republicans come hell or high water. Whether Obama or Romney wins will make no difference to the gridlock that will result.

The US faces the problem of tackling its budgetary deficits. In good times and bad, for the last 30 years, the US has run a budget deficit except for the two last years of the Clinton administration. In the past, Congress has legislatedas in the Gramm-Rudman Actthat budgets should be balanced. But again and again the political system has failed to tackle the budgetary question. It does not help that compared to a Westminster-type procedure, the budgetary process lacks any sense of urgency. The President sends a message to Congress laying down his ideas, but then it is Congress that constructs the budget and passes it. In the middle of all this, Congress needs on occasion to extend the ceiling on total national debt so the government can continue to borrow. Clinton was once faced with a shut-down because Congress would not raise the ceiling. Obama came close to this.

This time around, there is another challenge that Obama faces. The Bush tax cuts are about to expire in December unless Congress extends them. Obama wants to repeal the tax cuts for high earners but retain them for the rest of the middle class. A Republican House will not let him do that. If he keeps the Bush tax cuts intact, he will have trouble with the Democratic Senate. If Obama is re-elected, he may be reluctant to compromise; Congress may be more willing to concede, especially if the lame duck members see that there will not be any substantial change in the party balance in the new Congress. If there is a deadlock and the Bush tax cuts expire, there will be a serious withdrawal of fiscal stimulus; indeed, a reversal of stimulus into a cutback of about 4% of GDP. So, a deadlock means a double-dip recession in 2013. If Romney wins, the same scenario applies, but it will be the Senate that will be recalcitrant. Unless, of course, everyone acts in national interest and behaves themselves.

But a bigger problem is that something has to be done to lay down a path that the US will take which will tackle the debt hangover relative to the GDP. There was the Bowles-Simpson Commission which did report on it, but Obama has been unable to get Congress to act on its proposals. The ideological divide between tax-cutters who want to put all the burden on spending cuts (except for defence) and those who want to preserve spending especially on health and social security but raise progressive taxes is pretty much unbridgeable.

Given that the political system is dysfunctional at least when it comes to tackling budget deficits (rings a bell, doesnt it), a gridlock may yet be the best answer to the USs problems. There is an automatic cut that has been legislated which will come into force if Congress has not agreed to an alternative strategy. This Act is in the same spirit as Gramm-Rudman. If it comes into force, this would be the nearest the US comes to IMF conditionality. It will force budgetary discipline, which Congress and/or President Obama or Romney are unlikely to be able or willing to deliver.

The US is not the first country that fails to realise that the good days are over. Its the economy, stupid! If you run the economy for years on a double deficit in trade and budget, then sooner or later you have to pay the price. The recession has diverted attention from the normal weakness of the US economy. Now the chickens are coming home to roost!

The author is a prominent economist and Labour peer