Of course, the world should be thankful that Washington finally appears to be taking deficit reduction seriously. The credit-rating agencies have been ringing their alarms louder lately: Without a viable plan to rein in spending on entitlement programs such as Social Security and Medicare, the United States will hit a debt wall sooner or later.
In its December report, the deficit-reduction commission appointed by Mr. Obama and headed by Clinton-era budget director Erskine Bowles and ex-Republican senator Alan Simpson, recommended measures that would slash growth in the federal debt by $4-trillion by 2020. But that was well before a string of dismal reports – on jobs, housing, manufacturing and consumer spending – forced economists to revise their growth forecasts downward.
“In an ideal world, you'd have the promise of deficit reduction à la Simpson-Bowles commission coupled with continued stimulus now focused on supply-side benefits, such as infrastructure spending that would make the economy stronger later,” Mr. Mallaby offers.
Instead, the current fight between Democrats and Republicans for political advantage could just lead to the worst of both worlds, as Congress moves to slash spending in the short term without risking the wrath of voters by reforming their cherished entitlements.
If this is a recovery, why do we still feel sick?
Vice-President Joe Biden is brokering debt talks with congressional leaders as the clock ticks toward the Aug. 2 deadline. But additional short-term stimulus measures will be a tough sell. A group of 103 Republican members this week called for immediate spending cuts of $380-billion during the 2012 fiscal year, which starts this coming Oct. 1.
“At a certain point, you have to back off the stimulus. The amount of debt you have becomes either politically or economically difficult to sustain,” Mr. Mallaby explains. “We're at that point in a political sense more than an economic sense.”
The result is that the U.S. economy appears condemned to endure a prolonged period of subpar growth, if not a double-dip recession. (So far, strong banks and a robust housing sector have insulated Canada from the pain it typically feels when the U.S. economy stalls. But for how long?)
Recoveries following a financial crisis tend to be slow going. By this point in the average postwar recovery, the U.S. gross domestic product had risen 9.4 per cent above its low point. But this time, U.S. GDP is up barely half that amount, according to Mr. Mallaby. He does not expect any sudden improvement.
“The larger truth is that the pressure to rein in government spending, coupled with continued pressure on household consumption from soft house prices, points to tough times ahead,” he wrote in a June 3 report. “The latest grim jobs report may not be the last.”
It probably won't turn into a depression. For millions of Americans without anything else to compare it to, it will only feel like one.
Konrad Yakabuski is The Globe and Mail's Washington correspondent.
