A Famous Victory

Jan 22, 2013 | Updated Mar 24, 2013

The curtain has come down after Act I of the Fiscal Cliff. Some critics have proclaimed it a victory for the president over his Republican enemies. Others have complained that, once again, the president failed to take a sufficiently firm stance in favor of the positions he took as a candidate, or more accurately the positions most of his electoral supporters hoped he would take once re-elected. If it was a victory, it was an expensive one. The Bush tax cuts, designed to emaciate government and glorify individualism, have now been made permanent for nearly 99 percent of the population. Meanwhile, the temporary reduction in payroll withholding taxes has been allowed to expire.

The ability of the Republicans to draw further blood by refusing to approve an increase in the debt ceiling has been left intact. And, most disturbing, the questions of by how much spending will be reduced and which programs will bear the burden have simply been postponed for a few months. It seems likely that the economic damage done by restoring the withholding tax will be doubled with another "compromise" reduction in spending on health, education, social security and infrastructure, the very investments that would most effectively bolster America's economic future. So, as Robert Southey put it in the concluding stanza of

The Battle of Blenheim:

And everybody praised the Duke
Who this great fight did win.
"But what good came of it at last?"
Quoth little Peterkin.
"Why, that I cannot tell," said he;
"But 'twas a famous victory."

The Battle of Blenheim in 1704 was one of the first and bloodiest of many battles in the 14-year War of the Spanish Succession, between the English and their various allies fought with the French and their allies about which would get to choose the next king of Spain, a declining but still immense global empire. In the end many treaties were written and compromises made and broken; but nobody truly won, as Southey's poem correctly suggests. The losers in the hundreds of thousands were the dead and maimed combatants and collaterally murdered civilians.

Winning the Battle, Losing the War

So now, the Duke, our President, has focused his attention on winning the battles, while conceding the war from the get go. America and the whole world of wealthy nations are in desperate need of more government spending to create more jobs. But, from the start, before he was even elected, Obama has focused on the Republican agenda of reducing the deficit, rather than the urgent national agenda of creating more jobs.

Odd as it may seem, the private sector of the U.S. economy has actually been doing reasonably well since the Great Recession ended in the middle of 2009. However, this growth at a relatively healthy rate around three percent has been cut back by a steady reduction of Federal and local government spending equal to about one percent of national income each year. As a consequence, the American economy has actually grown at about two percent a year since the middle of 2009, keeping unemployment and the withdrawal of discouraged job-seekers at unhealthy levels. The private sector recovery has been fueled by the demand for single family houses created by rising apartment rents, exports to emerging markets, opportunities created by the new abundance of inexpensive natural gas produced by the environmental infractions of hydraulic fracking, reductions of debt, led by home-owner defaults on mortgages and deleveraging by financial institutions, and, it seems, an epidemic of local efforts to create new enterprises and new jobs without the support of major institutions.

But now, just when the private sector recovery seemed to be reaching takeoff speed by powering a turnaround in state and local finances, it appears that the Federal government will nullify these improvements sufficiently to keep growth at the unsatisfactory level of 2 percent or even lower. Instead of the fatal Fiscal Cliff, we are likely to be subjected to a Fiscal Hill mild enough to keep our economy alive but still in pain. Since a similar obsession with austerity dominates government policy in Europe and many other wealthy countries, the prospect for the global economy is also for anemic growth. These observations are not to be confused with the mantra of Mitt Romney, Paul Ryan and the Wall Street Journal that government stimulus programs are the problem and the private economy would be fine if there were no government. The problem is too little government stimulus while unemployment remains high. Now that this situation has already persisted for five years, significant damage has already been done to the future size, skills, and motivations of the labor force. This in turn implies less ability to meet our future economic needs, such as supporting a growing population of elderly citizens relative to the working age cohort.

Consequently the continuing danger for most of the rich nations in the world is that their own governments will continue the austerity policies that have driven Europe's most troubled countries into depressions and its wealthiest countries into stagnancy or mild recessions. An already regrettable fiscal stringency in the United States could easily become something even more undesirable. On the other hand, the central bankers of the world's most important economies have been steadfast in their determination to offset the ill-effects of austerity and to do whatever they can to avoid a financial crisis -- and central banks are very well equipped, indeed designed, to forestall financial crises.

Asian Potboilers

In recent years I have written several posts that discussed the growing strength, especially in Europe, of political parties strongly committed to nationalism, militarism, authoritarian governance and more forceful economic stimulus, quite similar to the ruling parties in the totalitarian Axis countries, against whom the United States and its allies fought World War II. Japan, under the newly re-elected leadership of Shinzo Abe, looks much like those regimes with its revanchist commitments to nationalism, re-militarization, and full-fledged economic stimulus. And like those earlier regimes it offers substantial hope for economic progress along with its many political and ethical shortcomings. New regimes in South Korea coupled with new rhetoric from the north, offer similar hope. There is also some small probability that the new leadership in China will actually attempt to focus on policies that increase economic benefit to most Chinese rather than continuing to boost exports.