Political India: Engaging America

From The Hindu

In possibly its most optimistic economic forecast to date the White House this week revealed that its projected rate of growth of real gross domestic product of the United States was 3.1 per cent in 2012 and 2013, after it grew at 1.6 per cent during the four quarters of 2011.


The positive numbers were part of the Annual Report, titled “To Recover, Rebalance, and Rebuild,” compiled by the Council Of Economic Advisers and submitted by the CEA to President Barack Obama, who is then due to transmit the study to the U.S. Congress.

The study also said that the Administration “expects the employment situation to continue to improve in coming years,” specifically noting that the average monthly change in payroll employment was projected to rise from 146,000 in 2011 to about 167,000 in 2012.

“At this pace, two million jobs will be created during 2012, an increase from the 1.8 million created last year,” the report said, a number that CEA Chairman Alan Krueger underscored in a conference call with media on Friday.

Notwithstanding the downside risks that could emanate from the continuing financial crisis in the European Union economic area, the CEA expressed hope that such shocks that slowed growth in 2011 would not impede “an upturn in economic growth.” With the economy now operating below its capacity and many resources still underutilised, the CEA said that it had forecasted that the recovery would continue to gain strength.

Describing consumption growth during the early 2000s as unsustainable owing to “excess leverage” and arguing that this leverage had led to the financial crisis, Dr. Krueger noted that future growth in consumption would be in line with income and de-leveraging had already occurred in the U.S. economy.

Future growth would also be consistent with the President’s goal of doubling U.S. exports by 2015, Dr. Krueger noted, indicating that he expected export growth to be strong and to play a key role in driving overall GDP growth.

Looking towards longer-term trends in growth the CEA report however admits that real potential GDP was projected to rise 2.5 percent a year in 2007–2022, which is slower than the long-term historical growth rate of 3.2 percent a year.

“The projected slowdown in real potential GDP growth reflects the lower projected growth rate of the working-age population and the aging of the baby-boom cohort into retirement,” the report explained, adding that the financial crisis and the 2007–09 recession, in contrast, were expected to have little effect on the level of potential real GDP, because they were not expected to permanently reduce any of the demographically-determined elements of long-term growth.

From The Hindu

After months of haggling the Congress has agreed a proposal for extending President Barack Obama's payroll tax extension and unemployment benefits package for the rest of the calendar year, handing the administration an election-year victory and bringing relief to over 160 million middle-class Americans.


While Republicans have secured a partial success in the negotiations by not compromising on Mr. Obama's request to end tax breaks for millionaires, the breakthrough in Congress this week is likely to buoy the President's prospects heading into the November presidential elections. The latest deal will also help prevent a pay cut for doctors who accept Medicare patients.

Speaking earlier this week Mr. Obama had pressed Congress to agree the stimulus-like package saying, “When a plane is finally lifting off the ground, you don't ease up on the throttle. You keep the throttle on full. You keep going. And our plane is up there, but we're not at cruising altitude yet.”

Yet it is unlikely that the payroll tax cut deal alone will see the economy through its post-recession woes. Experts argued that given the absence of additional revenue from a higher tax rate for the wealthiest Americans, this week's tax cut would likely add $100 billion to the federal deficit. Combined with continuing economic instability in Europe the overall downside risks to the U.S. economy may still be high.

High deficit levels notwithstanding Mr. Obama continued to train his guns on boosting infrastructure and education-sector investments and putting more money in the pockets of ordinary Americans. At a briefing on Tuesday he said he had released a blueprint for an economy “built on new American manufacturing, and new American energy sources, and new skills and education for American workers, and a new focus on the values that are the bedrock of this country.”

From The Hindu

Although Democrats and Republicans were no closer to agreeing on a deal to extend the United States’ debt limit at the end of this week, political leaders across the board appeared to acknowledge the severity of the radioactive fallout of the potential sovereign default that could occur on August 2.

In particular Governors of numerous states lamented the almost certain federal expenditure cuts that would come out of the ongoing negotiations in Washington, arguing that such any such funding shortfall could further cripple the recovery at the state level and hobble job creation.

Martin O’Malley, Governor of Maryland and a Democrat, was quoted saying, “If I can use a whitewater analogy here, the two rocks we need to shoot between is, on the one side, being needlessly driven into default, which will kill the jobs recovery... The other rock is massive public sector cuts, by whatever name, that would also kill the jobs recovery.”

Mr. O’Malley was speaking at the National Governors Association in Salt Lake City, along with others such as Republican Governor Haley Barbour of Mississippi, a Republican, who described the prospect of the U.S. defaulting on its debts as “terrible” for states. “No matter what happens, states are going to get less money from the federal government,” Mr. Barbour reportedly said.

After a series of week-long, intense negotiations, President Barack Obama on Friday reiterated his message calling for a “balanced approach” that would include not only spending cuts but also higher revenues from taxes on the wealthiest Americans.

If a deal was not reached, he warned, another serious consequence of default would be that all American households would anyway face higher borrowing costs that were tantamount to a tax. “We could end up with a situation... where interest rates rise for everybody all throughout the country, effectively a tax increase on everybody...” he said.

While Republicans have advanced numerous proposals to agree a debt limit hike Mr. Obama argued that such short-term solutions were not as desirable as a deeper reform of the U.S. deficit-accumulating tendencies.

Even as rating agencies such as Moody’s and Standard and Poor’s put the U.S. on notice this week, warning that the failure to break the negotiations logjam would lead to a credit rating downgrade, Mr. Obama appeared to reject proposals by House Republicans Senate Minority leader Mitch McConnell to pass an emergency measure allowing three short-term increases in the debt ceiling.

Distancing the White House from Republican calls for a balanced budget amendment, or a change to the constitutional debt limit rule, Mr. Obama said that the U.S. was not the same as Greece or Portugal.

He said, “Our problem is we cut taxes without paying for them over the last decade; we ended up instituting new programmes like a prescription drug program for seniors that was not paid for; we fought two wars, we didn’t pay for them; we had a bad recession that required a Recovery Act and stimulus spending and helping states — and all that accumulated and there’s interest on top of that.”

Ben Bernanke, Chairman of the United States Federal Reserve, has issued his sternest warning to lawmakers yet, to keep negotiations over the U.S.’ debt ceiling separate from the debate on restructuring longer-term fiscal priorities.

His comments this week came even as the U.S. Congress and White House are locked in no-holds-barred negotiations on raising the debt limit from its already eye-wateringly high level of $14.29 trillion.

While Democrats, who control the White House and Senate, need Republican support to push through the extension of the debt limit when the deadline of August 2 is reached, Republicans have thus far been unwilling to yield ground unless their demands for public expenditure cutbacks are met.

In this backdrop Mr. Bernanke said during a conference here, “I fully understand the desire to use the debt limit deadline to force some necessary and difficult fiscal policy adjustments, but the debt limit is the wrong tool for that important job.”

Cautioning lawmakers that failing to raise the debt ceiling in a timely way would be self-defeating, Mr. Bernanke added that budget dynamics at this point were “unsustainable,” given that a larger public debt implied higher interest costs and this in turn caused the deficit situation to worsen further.

Citing some of the deleterious effects of such a gargantuan debt, Mr. Bernanke said it crowds out private capital formation thus reducing productivity growth. Further, he said, when the debt is financed by borrowing from abroad, a greater share of future income has to be devoted to interest payments to foreign debt-holders. Finally massive debt also poses a danger to policy as it impairs policymakers’ ability to respond effectively to future economic shocks, he noted.

While the consequences of a debt default would have serious ramifications for the sovereign rating of U.S. debt, an issue of equal concern to lawmakers in recent times is that fiscal cutbacks may impede the ongoing economic recovery, with the prospect of a double-dip recession not entirely ruled out.

Mr. Bernanke’s words may be heeded by Congress, however, as in April the Standard & Poor's credit-rating agency revised its outlook on the safety of long-term U.S. debt to “negative” from “stable.” Earlier this month another agency, Moody’s, warned that the U.S. risked “losing its triple-A credit rating unless swift and significant progress is made over its debt ceiling,” according to reports.