Among several uncertainties around the world, one has gone. Obama got more four years. Though it has a (tight) majority on the Senate, the House of Representatives is still “controlled” by the opposition. This situation threatens not only the sluggish US recovery, but also impacts negatively other economies.
In the end of the year some tax cuts will expire and unless a bipartisan agreement is reached it will impose contractionist measures amid a still problematic labor market dynamics. It is true, however, that the unemployment rate has been experiencing a negative trend since 2010, but the level is still high:
Increasing taxes and cutting federal spending (something already done by the state and local governments) may bring US to recession before a Reinhart-Rogoff sort of recovery, i.e., achieving the pre-crisis level.
A contraction in an important economy like the US (and the whole problems that emerge from uncertainty) will hit Europe. The recession in the Euro Zone (even with asymmetric dynamics within the monetary union, the prognostic is far from desirable even in the core) will be increased and the market may pressure countries through debt yields, again.
The occident problems may also spread to other key countries such as the growing-but-less-than-before-China and low-growth-Japan. China still has great growth rates, but its economic model may not hold them for too long without changes.
Adding the protectionist measures in Brazil that reduce long-run growth (and have in some extend also been reducing short-run growth), the political problems in Russia and the complicated Indian economy, a recession in the US is far from desired.
Paul Krugman says that the fiscal cliff is overstated. He is usually right, let's hope he is once more. Perhaps the transmission may also be less damaging. It’s all in Washington’s hands.
P.S.: I thought the title of this post was very clever (I still do actually), but I found out that The Economist had an article with the same title in 2000, (here). It happens.
You mention it "it’s all in Washington’s hands". HELP!!!!!
ReplyDeleteThat's where most of the problem is. The only way US is going to get out of this messs is for US entreneurs to do what they do best - find solutions that bypass the crap dished out by politicians. Science and Engineering continues to progress forward through sheer product ingenuity. And if policitians can leave the markets alone, they will always resolve themselves. Not necessarily without pain, but they will resolve.