While Americans gradually focus on this year’s presidential race, economists are raising alarms over some critical decisions that must be made before the end of the year.
With the usual Washington gridlock heightened by election-year venom, failure to act could throw the economy into a tailspin and further cement our image as a dysfunctional democracy.
The pending collision involves two issues: massive spending cuts and expiring taxes. Without intervention, both are set to occur on Dec. 31.
The spending cuts were part of the solution to last year’s national debt-limit crisis.
Unable to reach agreement, Congress mandated large defense and domestic spending cuts, thinking that Republicans despise defense cuts and Democrats abhor cuts in social programs.
Only with that gun held to their heads could the two sides reach a compromise, or so the thinking went.
A “supercommittee” was formed which eventually threw up its hands and gave up.
The gun remains cocked and loaded.
Congress must also act to either extend or end the payroll tax breaks that have been in effect for the past two years.
Republicans were reluctant to renew those cuts last year, arguing they failed to stimulate spending. Democrats, meanwhile, accused them of seeking tax breaks for millionaires while opposing them for ordinary workers.
Republicans finally realized they couldn’t win that argument and gave in. The tax breaks held for another year.
This is typical. With a divided Congress, gridlock rules leaving us incapable of addressing large, complex, serious problems.
Mohammed A. El-Erian, a chief investment officer for Pimco, a massive investment management firm, warns that failing to address the mandatory spending cuts and tax increases will devastate an already weak economy.
Writing in Friday’s Washington Post, he warned it would have the same effect as removing “4 percent of national income in one blunt go.”
Which, to some, might sound like a pretty good outcome — forced austerity to curb government spending.
But others see sudden government cost cutting leading to the sort of economic disaster that is unfolding in Europe.
There, unemployment averages 10.9 percent, nearly 3 points higher than in the U.S. The unemployment rate in Spain is 24.1 percent overall and an astounding 51 percent for those under 25.
The thinking several years ago was that the quickest way to help these troubled economies was to cut government spending.
But the opposite seems to have occurred: as the PIGS (Portugal, Ireland, Greece and Spain) have slashed government spending their economies have worsened, plunging them into an even deeper recession.
The U.S., meanwhile, has taken a more moderate course. Even so, state and local governments have eliminated more than 600,000 jobs over the past four years.
The real danger for the U.S. is a government so wracked by political infighting that it is incapable of not only identifying a rational course, but in taking any action at all.
And none of this will get any easier as the election approaches and each party seeks to win the presidency by vilifying the other.
Postponing this work to the seven weeks between Election Day and the end of the year would leave a very small window for making very big decisions with no margin for error.
And that’s no way to run any enterprise.
rrhoades@sunjournal.com
The opinions expressed in this column reflect the views of the ownership and the editorial board.
Send questions/comments to the editors.
