Weekly Standard Online
December 29, 2012
by Irwin Stelzer
This is the time that tries economists' models. It has become the fashion at this time of year for forecasters to opine on the growth of GDP, the level of unemployment, the inflation rate next year—to at least one decimal place. I respect those who consult their models and intuition to come up with forecasts, but have neither the wit nor the courage to attempt such an exercise. Instead, I offer a comment on one aspect of 2013 that is often overlooked: the state of our political economy. The coming year will see a war between politics and economics, between a political class bent on transferring resources from the private to the less productive public sector, and an entrepreneurial class that, uninhibited by policy errors, can power growth at a rate most forecasters do not see in their crystal balls. That war will be waged whatever the result of negotiations, underway as I write, to prevent a leap off the fiscal cliff.
Most of the news in the closing days of 2012 has not been good. Holiday spending grew at the anemic rate of 0.7 percent according to one source (other surveys disagree), consumer confidence and share prices dipped, activity slowed in some regions, and negotiations over the cliff made clear that President Obama feels no need to compromise with a fractured and inept Republican House, over this or any of the issues faced in 2013.
The so-called fiscal cliff was a sideshow, distracting attention from two key and unresolved political issues that will play out in decisions about economic policy. The first is the rancorous tone of political life, due less to personality clashes than to profound differences in ideology. The president wants the "rich" subjected to higher tax rates to fund an expansion of government—a comparable increase in the tax take by closing loopholes will not do, for reasons that mystify those who don't understand that one of the president's goals is to fracture the Republican Party, as Charles Krauthammer has pointed out in his columns and on Fox. And he has no intention of reining in spending. On the other side of the political divide are many Republicans, with a majority in the House, who believe any tax increases provide revenues that feed a freedom-threatening growth of government, and stifle incentives for private-sector actors to invest and create jobs. In addition there are practical politics: The president wants to keep his left on his side, and congressional Republicans believe a vote for an increase in tax rates is a vote to join the unemployment queue. Those competing views foretell a year of battles over spending and tax policy—uncertainty, as market watchers like to call it.
Unfortunately, early in 2013 this market-rattling rancor will have multiple platforms on which it can be displayed. On January 29 the president delivers his State of the Union Address, his favored platform from which to attack his opponents. The televised meeting of both Houses of Congress provides a huge audience, and his targets, arrayed before him in the audience, have no prospect of responding before an audience of comparable size, as the members of the Supreme Court have learned. If you want to see good manners, don't look to the president, who plans to let the country know just what he thinks of the Republican opposition, which isn't very much. Not designed to smooth the path to compromise.
Then, there is the small matter of the debt ceiling. Monday the government reaches the limit of what it can lawfully borrow, but Treasury Secretary Tim Geithner can get by until February by juggling accounts—a juggling act that might put corporate treasurers behind bars if they emulated the keeper of our nation's books. If Republicans somewhere along the line waive their right to hold out for spending cuts in return for raising the debt ceiling, they will have surrendered their last chance to rein in Obama's spending. The last time congressional Republicans unholstered this weapon America lost its triple-A debt rating. But Republicans feel they are in the last-chance saloon, with the debt ceiling negotiations their only weapon to force Obama to trade spending cuts for an increase in the ceiling.
The good news is that these opportunities for the expression of mutual distaste are concentrated in the early part of the year. The bad news is that there is no sign that the politicians are prepared to mount a serious attack on the $1 trillion annual deficits that are adding to the nation's debt mountain, or to modify the unaffordable retirement, health care and other commitments made to America's aging population. As Hudson Institute scholar Chris DeMuth noted in a recent essay in THE WEEKLY STANDARD, "America's de facto fiscal policy since the early 1960s [has been] continuous government borrowing to pay for current consumption." America's structural deficit—the one that will persist even if the economy recovers fully—comes to almost 7 percent of GDP, the highest of any rich nation with the exception of Japan.
Offsetting these depressing (in more ways than one) politics are signs of strength in the economy.
If there were a scientific method of predicting whether political drag will offset the private sector's inclination to go about the business of investing, creating jobs, and adding to wealth I would use it. There isn't. All I can offer is my guess that even inept government cannot for long stifle the animal spirits of America's investors and consumers, and my best wishes for the New Year.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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