Daily Archives: November 22, 2011

To many, the budgetary gridlock in the US may appear as intractable as that in Europe. But the reality is that the American situation is vastly more favourable. The reason is that the Congress has already passed laws sufficient to permanently fix its budgetary problem and put the nation’s finances on a stable path. All that is necessary is to do nothing and to let the laws on the books take effect.

Without congressional interference, laws already in force would reduce projected deficits by approximately $5,500bn over the next ten years, plus another $1,000bn in debt service savings. This is not enough to balance the budget, but it is sufficient to stabilise the debt to gross domestic product ratio at its current level of about 60 per cent.

The problem, of course, is that neither Congress nor the White House has shown any inclination to allow the laws on the books to take effect. There are reasonable concerns about allowing a large fiscal contraction to take effect when the economy is still fragile, and it’s not hard to come up with better ways of reducing the deficit than those now scheduled to take effect. The main constraint is politics. With the big scheduled spending cuts and tax increases taking effect in 2013, neither party is anxious to promise specific austerity measures going into next year’s presidential election. Everyone hopes their hand will be strengthened by voters and the burden of fiscal adjustment can be shifted elsewhere. Continue reading »