In the economy

The choice of a decade

November 29, 2012 Maxim Blunt

The main question that today occupies almost everyone who has at least any relation to the economy is what negotiations will end in the Congress of the US President with the Republicans on the issue of “fiscal cliff”, on the edge of which the American economy balances.

The essence of the problem is simple: four years ago, after a series of exchange crackers, which became the culmination of the financial crisis, in the USA (as well as in other countries), unprecedented measures were taken aimed at supporting and restoring the economy. Even if not to be considered an analogues of the “zero bets” policy and regular injections into the US financial system by the Fed forces of hundreds of billions of dollars within the framework of “quantitative mitigation” programs, stimulation measures cost the federal budget in trillion dollars. These trillions have become part of public debt, the size of which grew to threatening sizes.

Four years ago, when Barack Obama was preparing for his first inauguration and the beginning of the implementation of the grandiose “Obama Plan”, no one could even assume that the validity of extraordinary stimulation measures would last so long, and the effect would be so modest. Many then thought that in a year, two from strength, it would be possible to patch up the financial system, pump it with fresh money, launch a self -supporting mechanism of economic growth, smoothly get out of the emergency financing regime and live, as before the crisis. Already in mid -2009, a discussion of the “exit strategy” began from the emergency financing regime, the implementation of which was supposed to begin no later than 2010.

One way or another, the validity of stimulating programs expires this year, and already in January the American economy devoid of state “crutches” risks collapsing into a “fiscal abyss”, having pulled the rest of the world into a global recession. Actually, about how to prevent this, and Obama is talking with the Republicans. The parties are looking for a compromise between the two extremes - a “jump” into the abyss and automatic extension of all current measures for an indefinite period.

These extreme options analyzed the budgetary department of the US Congress, drawing up two alternative scenarios based on them. “Jump to the abyss” will lead to a sharp fall in the American economy in the first half of 2013, an increase in unemployment. But the restoration will begin in the second half of next year and in general over the year, the economy will lose only 0.5% of GDP. But then, thanks to the healing of American state financials, the period of rapid recovery will begin. In 2014-17, the American economy will grow on average 4.3% per year. The budget deficit will remain, but by 2018 it will decrease to 0.4% of GDP, and by 2022 it will only grow a little - to 0.9% of GDP. As a result of the growth of the economy and the low level of budget deficit by 2022, the state debt level will significantly decrease. Unemployment, having reached 9%next year, will decrease to 8.4%at the end of 2014, and by 2017 - to 5.7%.

As for the preservation of current programs and incentives, it is fraught with a “lost decade” - an analogue of Japanese stagnation, a quick increase in public debt and a full -scale budget crisis in 2022, when this debt will become impossible to serve.

In fact, the budgetary administration of the Congress contrasts “shock therapy” with the hope of the subsequent recovery of a ten -year agony. Unfortunately, the “bottom” of a fiscal cliff can be much deeper than analysts who wrote the script. According to Economists of Credit Suisse, the fall of GDP next year in the case of turning budget programs and tax messages may not be 05% of GDP, but 5.1%. Many other independent economists came to similar conclusions. In addition, as the Greek experience clearly demonstrates, an attempt to sharply improve public finance by reducing government agencies and increasing taxes, does not always lead to economic growth.

True, the state debt will also not be possible to increase to infinity. If in some ways experts of the budget administration of the congress and are right, it is in the inevitability of a debt crisis, which can burst out much earlier than 2022.

So now Obama and Republicans are looking for a “golden mean” between poor and very poor scenarios, trying to reduce expenses and increase budget revenues in such a way that the economy is minimal. The task is not easy, especially when you consider that the Republicans and Democrats offer exactly the opposite methods of solving the problem, and there are very few time for negotiations. At the stake there is a state and development vector of the entire world economy for at least the next decade.

Photo by EPA/ITAR-TASS/Justin Lane/New York