American headache



Alsir Sidahmed

Published — Sunday 6 January 2013

Last update 6 January 2013 12:00 am

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It was a typical last-minute deal by politicians with a short-term relief while the original problems are yet to be solved.
Just hours before midnight, as people prepared to ring in the New Year, the Democrat-led US administration and its Republican counterparts struck the much-awaited deal.
Quickly the two houses passed the agreement by 257-167 votes thus averting automatic tax hikes and a freeze on some government public spending.
The deal was basically a political tradeoff between the two parties, who were keeping their eyes on their respective constituencies.
Accordingly, it will generate $ 600 billion in new revenue over a period that extends over a decade.
That is less than half of what US President Barack Obama was asking and hoping for.
He was also given part of his demand on raising taxes on the super-rich that constitutes only around 2 percent of the population.
But on the other hand, the deal averted any tough decision on cutting public spending on military, medicare and social security.
But that was not enough for two camps -— the typical conventional institutions the International Monetary Fund (IMF), who though welcomed the move to avoid the fiscal cliff, asked both the administration and the Congress to do more to put the country’s public finances in order at the time not to threaten the weak recovery gaining pace.
It actually recommended two specific steps to be taken — to check public spending and raise the public debt ceiling in a bid to boost market confidence.
From the market, a more stern warning came from the top two US credit rating agencies: Moody’s, and Standard and Poor.
They have indicated their unhappiness with the US deficit that has topped $1 trillion in each of the past four years.
That is why the two agencies, like the IMF, believe that more steps are required to first contain and then address this chronic problem, which has pushed the two agencies to lower the US ratings last year, while sticking to their outlook on the negative side.
The comments by the IMF and the credit agencies on the need to contain deficit appears to be a typical advice given to a typically troubled developing country lining up to obtain loans through some austerity programs.
Economic management is not an issue related to a country’s size or its global status. Eventually, it hinges on the way each country implements its economic policies.
When former President George W. Bush entered his oval office in the White House in 2000, he inherited a surplus budget from the previous Clinton administration.
As his administration gave priority to its war on terror and in some cases opted for a war by choice as the case with its invasion on Iraq, it quickly turned that surplus into deficit. As politicians raced with time to avoid the fiscal cliff, the deficit stood at $ 16.4 trillion and was waiting some lifting to allow for government to continue functioning.
The IMF and credit agencies used to release their observations and reports on the US economy — though they were not taken seriously by US officials.
But this time it looked different. The is because of the clear writing on the wall on the expected consequences of any failure to avoid the fiscal cliff, whether domestically or in relation to the economies of the rest of world.
China, however, welcomed the US fiscal deal as it will help boost its exports and help it reduce inflationary pressures on Beijing given the Chinese holding in US treasury bills and other investments that will be relatively secure now. Any failure in reaching a deal might have had a negative impact on the Chinese economy.
That could be partly a relief or a short-lived one.
Still, the coming months will be crucial. We will course of action the US economy will take and how domestic politics will determine the future not only for the US but for the rest of the world as well.

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