THE DEAL between President Barack Obama and Congress to raise the federal debt ceiling could avert a financial crisis, but also would threaten to aggravate the basic problems facing the US economy, including a stubbornly high unemployment rate and weak demand.
The agreement could immediately lift the cloud of uncertainty over the economy. It would end a political stalemate that could have caused the US to default on its obligations for the first time. Over the long term, the deal could help free the nation from what is fast becoming a crushing debt.
But, many economists say, the agreement could endanger the anaemic economic recovery – because of both what the deal includes and what it doesn’t. The government would cut back on spending that has softened the blow of the slowdown while failing so far to renew measures, such as a payroll tax cut, that have put money in consumers’ pockets.
The debt deal represents a striking reversal from a year ago, when jobs were top of the government’s agenda and both parties were arguing over who had the best plan to increase employment. But even as the agreement threatens to tamp down growth this year and next, it doesn’t go nearly as far as financial analysts and some senior officials had hoped toward reining in the national debt later this decade. In short, some economists warn, deficit savings are too modest in the future and too severe in the present.
The agreement would mean the government now has less money to provide employment opportunities for the 9.2 per cent of Americans looking for jobs. It would likely cut aid to states, whose own cuts are contributing to the weak economy, and eliminate at least $350 billion from the defence budget, prompting layoffs at government contractors. Americans would also have less money to spend next year because the president failed to persuade Congress to extend a 2 percentage-point payroll tax cut and unemployment insurance.
Mr Obama has frequently cited those measures, put into place in December, as important in offsetting sharply higher fuel and food costs.
“Why would you want to impose restraint on an economic recovery that’s already fragile?” asked Josh Feinman, chief global economist at Deutsche Bank Advisors. “You’re removing spending power from the economy at a time when it needs it. That’s likely to make the economy weaker.”
Mr Feinman added that a slowing economy would actually set back efforts to curb the debt.
The economy has been losing steam all year, and job growth has essentially stalled. Under these circumstances, most economists warn against cutting government expenditures at a time when the private sector is not spending enough. Many economists have called for additional federal spending to stimulate growth.
The budget deal tries to address these concerns by keeping spending cuts relatively modest at first – about $25 billion in 2012 and $47 billion in 2013 – before making much deeper reductions in the following eight years.
The budget agreement calls for savings across government. The reductions would increase pressure on states and localities, major recipients of federal spending. It will be up to lawmakers to decide specifically where savings will come from – aside from the one area explicitly targeted: student loans for graduate students.
Although the proposed cuts are significant, the deal falls short of the minimum of $4 trillion in savings that analysts say is necessary to tame the debt by the end of the decade. Standard Poor’s, the credit-rating firm, has threatened to downgrade the US if Congress cannot trim at least that much from the budget over 10 years. – (Washington Post-Bloomberg)