America and the global economy

by Brian Francis

Once again, the United States of America has found itself in the middle of an immense battle to reduce the country’s growing Federal budget deficit that now stands at $1.045 trillion.

The battle over what is being referred to as “sequestration” is simply the automatic reduction in public expenditure by some $85 billion that would arise if Democrats and Republicans are unable to reach a compromise on ways to close the budget deficit.

The problem in America is that everything to do with the economy is being driven by economic ideology and political philosophy simultaneously.

The Democrats, led by President Obama, want to adopt what they term a “balanced approach” that would see not only reductions in spending but also increases in tax revenue.

The Republicans, on the other hand, are somewhat hesitant to raise taxes further because they believe that America is facing essentially a spending problem; not a revenue crisis.

Indeed, with Federal tax revenue of just under $2.5 trillion, it is extremely difficult for me to imagine that the United States is actually running such a large deficit on its current account. And, therefore, the logical solution to that country’s fiscal nightmare should rest with massive reductions in Federal spending.

The problem here is that politicians, especially those on the Democratic side, will never see cuts in spending as the way forward since the idea of creating a society that is “just” and one where income and wealth redistribution are critical, remains paramount in the “progressive” agenda.




Although a strong argument can be made with respect to the need to focus on expenditure-reduction as opposed to tax increases, we have to accept that we are living in the real world and that compromise is therefore the way to achieve any reasonable objective of deficit reduction.

Hence, it is clear that in order to resolve the present stalemate, there would have to be some cuts in spending as well as some increases in taxes. It is within this framework that what actually happens in America could pose some challenges for the global economy.

You see, macroeconomic theory teaches that cuts in expenditure and increases in taxes are both, by their very nature, contractionary economic policies. What this means is that they have the potential to slow growth within the economy in the absence of any mitigating circumstances.

It is for this reason that the International Monetary Fund has already expressed some concerns over the negative impact of the “sequester cuts” on the global economy. And, every country in the world should be very concerned over the future direction of the American economy within the context of sequestration.

Let us not forget that a problem that started in the housing market in the United States only a mere five years ago quickly made its way to other markets and economies throughout the world and even today some countries are still fighting to recover from these shocks.

Hence, it is way too soon for small countries such as Barbados and others in the Caribbean to have to face the adverse effects of a fresh global economic downturn.

That is why what is happening in America with respect to sequestration should concern us all.

 

(Dr. Brian Francis, the former Permanent Secretary in the local Ministry of Finance, is a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Bridgetown, Barbados of the University of the West Indies)

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