Tuesday, 6 December 2011

Never fear, the Supercommittee is here?

Did anyone really believe that after the August US credit rating downgrade caused by political quarrels, stubbornness and instinctive self-preservation, a committee made of an equal number of Democrats and Republicans would actually reach a favourable conclusion? I didn’t think so.

After all the pleas for the Supercommittee to go big and seize the chance to create an impact and make a credible reform, in more than three months work, last week they’ve announced the inevitable failure.

I admit, on first sight it seemed like a good idea. Any form of political indulgence of the deal was removed. The Senate couldn’t use its filibuster power, there was going to be no amendments in the Congress; it was supposed to be a simple yes or no policy effective immediately. However, then I remembered that the topic was the US deficit and the actors were US politicians, the same ones responsible for the US debt downgrade and market panic in August this year, and I quickly came to realize any hopes of them coming up with a compromise solution was in vain.

The failure of the Supercommittee in the US results in several disappointing consequences. The first one is complete disgust of American voters over their politicians. I wouldn’t be surprised to see a record low turnout at the next Presidential elections. It is amazing to see that even when all obstacles are removed and when everyone is hoping for a credible solution, the nation’s politicians are unable to provide one. One signal is clearly sent to the voters – “remove us out of office”. 

Apparently the Republicans were reluctant to accept any tax rise (at least for the rich), while the Democrats refused to make cuts on various entitlement programmes (Social Security and Medicare). Once can see why each party was holding on stubbornly to its proposals as admitting defeat on one of the issues would automatically mean loss of reputation and voter support. But ironically, the inability to reach consensus is hurting them both even more. I would blame the two protest movements for this – the Tea Party and the Occupy movement are holding both parties to stick to their agenda and not let the other one get away with anything. The Republicans will not allow any taxation of the rich, something that the Democrats are very strongly in favour for. One couldn’t say the protest movements were a direct cause of the political lock down, but they definitely played a big role in shaping the opinions of each party’s representatives in Congress.

The second consequence is an inevitable fiscal contraction (Bush tax cuts will expire, so will the temporary cut in payroll taxes and unemployment benefits). The US will see an automatic $1,2 trillion deficit cut with half of that amount taken away from military spending and the other half from other areas such as education, housing, environment protection etc. It is questionable how the markets will react, since the ratings agencies welcomed the Supercommittee idea as a way for the US to prove its credibility for the AAA rating. Its failure increases uncertainty and prolongs any chance for a faster future recovery. Confidence in the economy cannot be increased under uncertainty. Next year will be particularly dramatic for Europe and more uncertainty coming from the US will only add to the gloomy picture the world economy is finding itself in. The political lock-down will last until the presidential elections in November 2012, which means that we can all anticipate a turbulent  2012, to put it mildly. 

The moral hazard of having two strong parties deciding the fate of the country is showing its most adverse effects. A political lock-down is causing an economic lock-down. It is striking how the US politicians, on one hand calling European leaders irresponsible for not being able to tackle the crisis, and on the other hand causing the same contraction to their own economy, cannot see the irony in all of this. The double-dip, both in Europe and in the US, will be caused by political incompetence and their lack of perception of reality. Is there anyone to put the politicians down to earth? The voters can, but they, just like the politicians, are seriously lacking options. 

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