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Global recovery hinges on US fiscal restraint


October 4, 2010
by Jonathan Emord

Jonathan Emord is an American attorney who practices constitutional and administrative law and is the Washington columnist for Troy Media.

Photo: Troy Media

Economists are concerned that fiscal policies in the US producing an ever-growing debt atop high unemployment levels will make it impossible for Canadian and European economies to recover from the recession.

Recently resigned White House Budget Director Peter Orszag has admitted that the US is “on an utterly unsustainable fiscal course,” while Federal Reserve Board Chairman Ben Bernanke predicts that “the federal budget appears set to remain on an unsustainable path.” Without a recovery in the US – the largest marketplace in the world – there will likely be none in Canada and Europe.

The US is now carrying $13.3 trillion in national debt and it’s projected to grow by at least $1.5 trillion a year into the foreseeable future. Interest on that debt, which represents about 52% of the US’s gross domestic product, will mount to more than $500 billion per year.

The official US unemployment number is 9.6%, but that figure does not include those who no longer are looking for work and those who are working at part-time jobs but desire full-time ones. If they are counted, the figure grows to 17 per cent. By contrast, Canada has a $542 billion national debt that represents about 40% of Canada’s GDP and unemployment hovers around 8 per cent. But the health of the Canadian economy is inextricably linked to its southern neighbor and to Europe.

The principal economies of Europe are faring worse than Canada. Germany has a $2 trillion national debt, representing about 60% of its GDP, and an unemployment rate of 8.2 per cent. The UK has $1.35 trillion in debt, about 62% of its GDP, and an unemployment rate of 7.8 per cent. Ireland has a $30 billion debt, about 42% of GDP, and 13% unemployment. France has a $1.5 trillion debt, about 67% of GDP, and 10% unemployment. Spain has a $128 billion debt, about 66% per of GDP, and 17% unemployment. Portugal has a $63 billion debt, about 80% of GDP, and 11% unemployment. Greece has a $93 billion debt, about 120% of GDP, and an 11% unemployment rate.

All of the economies of Europe are heavily dependent on US and Canadian trade and tourism, which have dropped significantly since the onset of the recession.

Fiscal instability in the US reverberates around the world but affects palpably those who invest in the American market and pay for its debt financing (China, Japan, and the Persian Gulf oil-exporting countries) and those who heavily depend upon access to American markets for sales of goods and services (Canada and Europe).

US Treasury securities are held principally by China, Japan and the Persian Gulf oil-exporting countries. As US national debt climbs annually, US securities become less attractive (often with the value of the dollar declining). Any movement by principal US securities holders to reduce their holdings will drive US interest rates higher, worsening domestic US credit markets and affecting the world dependent on those markets.

While plans are in place in Canada and in Europe to reduce government spending and increase taxes, the US has yet to take any meaningful action to do either. It continues to increase spending through the creation of greater entitlements and stimulus programs, and has no political appetite for tax increases.

On April 27, 2010, in a speech before the National Commission on Fiscal Responsibility and Reform, Bernanke warned that “even after economic and fiscal conditions have returned to normal” in the US, “in the absence of further policy actions, the federal budget appears set to remain on an unsustainable path.” If renewed growth does occur, he warned, “we cannot grow our way out of this problem,” and “no credible forecast suggests that future rates of growth of the US economy will be sufficient to close these deficits without significant changes to our fiscal policies.”

Bernanke believes changes must involve significant cuts in major entitlement programs such as Medicare and Social Security, freezing spending on every other part of the budget, and tax increases. 

Without a major recovery of the American economy, it’s doubtful that either Canada or Europe will be able to achieve a sustainable recovery from the recession, at least over the next several years. While there may be little sentiment in the US for tax increases – unlike Canada and Europe, where the public seems willing to accept the inevitability of those increases – welling public sentiment against the Obama Administration (with 53% of Americans disapproving of the President’s performance) may bring a new breed of politician to Congress. That new regime’s goal may be cutting back public services, but also cutting (not increasing) taxes.

While the former holds the greatest promise of reducing national debt, the latter, if it involves significant tax cuts, could trigger a more rapid recovery and, in the end, greater overall tax revenues from a supply-side effect.

The fate of the Canadian and European markets appear inextricably linked to the American market. Consequently, elimination of the political paralysis that now blocks meaningful fiscal restraint in the US is essential to global economic recovery. Obama has no stomach for meaningful cuts in federal programs, in federal regulation, and significant reductions in spending.

Although the President has no objection to tax increases, the American public abhors them, and any such increases will likely imperil a fragile economic recovery by decreasing savings, investment and job growth.

For America, and for the world, the only remaining course is for a new US administration to cut deeply from federal programs, remove anticompetitive regulations and eliminate individual income taxes. That course would appear the best way to impose fiscal restraint while expanding the American economy. Only it will create a domestic American market hospitable to greater international investment and trade while increasing confidence in Treasury securities necessary to finance a debt America will likely carry for many years to come.