International Policy Digest

Pete Souza
Longform /12 Sep 2012
09.12.12

In the Midst of Plenty: America’s Struggling Political Economy

Deficits don’t matter” was the refrain from the previous three Republican administrations justifying their unwillingness to adhere to their fiscally conservative campaign platform and doling out corporate welfare to any company aligned with their interests. It was utilized as a means to defend the nation’s ballooning deficit: depicting it as a temporary consequence to ensure the countries domestic economic stability.

During the past twelve years, as the United States’ debt rose perceived economic stability collapsed. As a result, the population has become increasingly concerned as to whether Washington can keep its fiscal house in order. America’s optimism has ebbed and flowed in the past, and most reactions to these events were a result of declinist thought and an over-inflated perception of the state’s position in the world. These were primarily the result of fear-mongering, perpetuated by the country’s leadership and media personalities, as well as consequences from ill-conceived domestic policies. To clarify, debts matter and the economy’s growth is painfully slow, but the country’s economic collapse is not “imminent.”

The American people have consistently relied on past events to reinforce their beliefs on the nation’s strength in defending their way of life. It is no wonder that not a decade has passed in the modern era in which declinism has not taken root. Similar to the national leadership that changed its mind about the importance of the nation’s deficit – now that a Democrat is in the White House – Americans are grappling with two diametrically opposing views of the country: perceiving it as both the strongest and weakest nation in the world. Many have lamented Washington’s inability to create a secure and equitable country, while, nearly in the same breath, reference how the government aided in promoting policies that have led to a better, more vibrant nation.

“Government has a role to play, it provides for security, it provides a certain set of predictable rules…It invests in infrastructure and in education.” – Senator Marco Rubio, ‘We Built It Event’ on 02 August 2012

In 2010, the IMF released a study, which suggested that most developed countries were nowhere near their borrower’s limit. The research was prompted by growing worldwide concern over national deficits, which have been exacerbated by not only the economic crisis in Europe, but also America’s failure to pass a second stimulus and inability to stabilize its bond yields.

Another study that same year shows the United States is on course to reach 100 percent of GDP by 2015; a more pessimistic view than the CBOs 90 percent by 2020 prediction. With the debt burden projected to reach 70 percent by year end 2012, America seems to be well on its way to achieve the hypothetical futures described in the studies.

Debt concerns abound nationwide, but time remains for the public and private sectors to initiate the necessary policies that would place the country on a more stable path; policies that are well thought out and developed from facts, not forced through as a temporary path structured from economic theology and ill-placed fear.

Stephen G. Cecchetti, M S Mohanty, and Fabrizio Zampolli examined the effects of sovereign debt throughout history and found it to do little discernable harm until it reached 85 percent of GDP, similar to Carmen Reinhart and Kenneth Rogoff study suggesting the number is closer to 90 percent.

However, America’s economy would continue to remain viable until it reached the absolute limit: 160 percent of GDP.

What the research indicates is that the system that drives the American economy is far from broken. The country has the time to choose a new way forward and its need to be spent in open discourse about what needs to be done to direct the country to a more prosperous future. The U.S. can ill-afford a leadership that can only govern through fits and starts, stalled by demands for obedience and ideological conformity from those across the aisle.

Eventually the market will change course and correct the stagnation undermining national progress. Problems will arise during this period as it will progress faster than Washington and will not wait for the consensus-building bureaucrats seem to desire before legislation can even be considered. Congress will not be provided the time it expects to straighten its books, threatening the viability of national institutions. Changes that occur in the marketplace without the government outlining how it can function has the potential to create chaos in all sectors at home and abroad, as witnessed by the world with unregulated derivatives trading market. For all the debates concerning public and private sector relations, the market’s success is dependent upon government investment; as President Obama stated in a 18 July 2012 speech: “we succeed because of our individual initiative, but also because we do things together.”

Even Republican candidate Mitt Romney agrees about the importance of government for market prosperity: “There are a lot of people in government who help us and allow us to have an economy that works and allow entrepreneurs and business leaders of various kinds to start businesses and create jobs. We all recognize that. That’s an important thing…I know that you recognize that a lot of people help you in a business. Perhaps the banks, the investors. There’s no question your mom and dad. Your school teachers. The people that provide roads, the fire, and the police. A lot of people help.”

National interest in private sector success has paved the way for the country’s economic prosperity that not only purchased the largest military in world history, but also provided the country an expansive soft power, particularly in culture and education.

“This bill exemplifies the commitment of the Republican majority to reduce spending, dig our nation out of record deficits, and rein in unnecessary agency regulation and interference that obstructs economic growth.” – Hal Rogers on de-funding the Consumer Financial Protections Bureau

As the international system became increasingly interconnected and interdependent, the traditional standards of power shifted from politico-military directives to socio-economic policies. World interest in markets, technological innovation, education, and cultural expansion did not wane in the aftermath of the global market collapse, meaning countries have recognized the continued importance of soft power.

Prior to the information age, the country with the largest military made the rules, but as the paradigm shifted and trans-national relations become increasingly important any nation or non-state actor has the opportunity to shape how the world is ‘governed.’ A changing international system has afforded new philosophies to come to the forefront and contest the well-established ideals that directed legislation and business policies for generations. The desire to remain relevant in a transforming world breeds conflict between the old and new, for a country’s power and ability to achieve its objectives can no longer be adequately measured by the amount of resources it controls.

As Washington’s reaction to this initiated a policy shift as a means to stave off hypothetical decline in stature and influence in the new world order, it focused heavily on investing in the country’s economic competitiveness. Solely placing its attention on market growth was not as beneficial as originally hoped, and, in 2008, the freedom provided to the private sector to ensure a competitive advantage ultimately undermined the progress the nation had made over the past decade. Since the collapse, national economic policies have brought about a positive outlook on futures and a desire for households to secure financial peace, but the new push to implement more austere measures threatens to undermine America’s medium-term growth.

The issue is that it is important for businesses to balance their books and set some finances aside. However, if the private sector saves too much then capital flow will be impeded. This has the potential to deepen the nation’s financial burden and mute the progress made during the stimulus recovery. Moderation is central for success. The demand for more moderate legislation, thus stalling the shift to austerity, stems from the concepts derived in basic economics. In analyzing the three sectors of the economy (households, private sectors, and public sector) only two sectors can have a surplus while the third must run a deficit. In order for individuals and the private sector to amass surpluses another entity – either households or the federal government (or another country) – has to maintain a deficit.

It is not surprise, then, that as personal and corporate savings rise the public sector continues to struggle with mounting deficits. In turn, if the government and corporations begin to streamline policies to remove the debt burden from their books it can only be moved to one sector of the economy – individual households, which are already suffering from high unemployment and stagnated wages.

“In the spring of 2011, federal spending cuts forced by Republican legislators took much-needed money out of the economy: combined with the 2012 budget, it has largely counteracted the positive benefits provided by the 2009 stimulus.” – Michael Cohen, “Did Republicans Deliberately Crash the US Economy?”

Deciding upon the proper policies to implement after an economic collapse is difficult because of timing and contending economic philosophies.

Individuals allied with Keynesian economics believe that a large public sector deficit (pertaining to risk) is exaggerated. Thus, if households save more and economies continue to function (even below capacity) then government should not roll back social programs or trim deficits. Individuals crying out for an age of austerity claim that high public sector debts hamper long-term growth and undermine the private sector’s stability.

Each side is correct. One the one hand, high public debt is a symptom of economic issues created by the private sector. If the government did not have the power to intervene in the financial collapse, the contemporary world would be far into a second Great Depression. With room under the debt, there remained some maneuverability for the country which protected the market system.

On the other hand, the budget gaps the federal government faces will not close during the recovery period; certain areas of spending will apply pressure to the swelling debt, particularly social programs. When fiscal tightening is instituted – particularly during times of economic strain – it builds national resentment, which can be easily allayed throughout monetary easing. The problem the current administration and Congress have is that monetary easing has already occurred to the point that it will be ineffective during the upcoming years. Moreover, with all countries struggling to stabilize their currencies there no longer remains the option to weaken one currency against others in order to achieve stability.

Thus, monetary weakening will not be as effective a policy as it was in the past. The United States does not have any leeway in developing an economic policy that could shore up the entire country, which is creating a political stalemate in Washington and stalling a speedy recovery. The stalemate concerning the debt’s impact is that as the economy grows interest rates will rise and when this occurs the United States will be forced to focus on interest payments financed through cuts in defense and social spending.

This situation may not be necessary as an analysis conducted by Alberto Alesina and Silvia Ardagna illustrates how economies can expand while deficits are being reformed.

“In the spring of 2011, federal spending cuts forced by Republican legislators took much-needed money out of the economy: combined with the 2012 budget, it has largely counteracted the positive benefits provided by the 2009 stimulus.” – Michael Cohen, “Did Republicans Deliberately Crash the US Economy?”

With the current economy remaining stagnant, an aging population prepared to transition into retirement, and rising federal interest rates, Washington is finding it increasingly difficult to quell the citizenry’s growing fears over the nation’s stability and security. Concerns arise as many perceive massive federal borrowing will eventually erode the stock of private capital available to finance investments, thus forcing a higher percentage of personal savings to be diverted.

The West’s future is dependent upon the political leadership’s ability to make the difficult decisions for the nation. If the transitional period is any indicator, the American people need to prepare for a difficult medium-term. What is at the heart of most disagreements in American politics is the concept of fairness when tackling the deficit – national leaders must ensure that the burden is shared equally.

Utilizing taxpayer dollars to inject liquidity into the domestic economy would not be as contestable if the achievements gained from federal investment were not so one-sided. The federal government and the financial industry were rightfully maligned after the collapse; the money spent to shore up that part of the economy never spread to the other sectors nor was it fully reinvested in the nation’s economic future, by way of loans. Instead the money was used to stabilize the investments of the few at the top at the expense of the people.

Protecting those interests has been a central initiative for the Romney campaign, who fails to comprehend the fact that Wall Street and Main Street progress as if they are two separate economies. A fiscal plan touted by Mitt Romney has been lambasted by the Tax Policy Center as a drain to America’s economy, because it fails to address the fact that “the reason [Americans] are not spending and investing” is “because their end customers…are hurting.”

Since 2009, average incomes for the country’s top 5 percent of wage earners increased, while the remaining 95 percent stagnated or, for the majority, decreased. This continued a trend of the past 40 years as the nation converted into a winner-take-all economy. America cannot survive on this course, for its will erode societal cohesion and ultimately destroy the market system. Supply and demand can only succeed when the demand side has the finances to purchase what is produced.