Gloomy Economy the Result of Debt

Wednesday, 08 Jun 2011 03:09 PM

By Herbert London

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For most of last few months the Obama administration has maintained a “recovery” is under way. Seizing on a modest reduction in the unemployment rate, the president has waxed lyrical about the upswing in the nation’s economy.

But the most recent economic data provides a very different picture. The 2011 economic slowdown is worse than any of the forecasts and is likely to be as substantial as the “crawl” in 2010.

Growth has slowed from 3.1 percent in the fourth quarter of 2010 to 1.8 percent in the first quarter with an anticipated rate of 1.8 percent in the second quarter.

Some of the slow down can be attributed to weak auto production, some to tragic effects of the earthquake and tsunami in Japan and some to the inability of the Congress and the president to come to grips with the fast approaching economic crisis based on accumulated debt.

There is no question that economic growth is the only politically effective way to keep a financial disaster at bay. That growth should be at the 3 to 4 percent level in order to finance a debt over $14 trillion that will rise to $26 trillion by 2020. But on the basis of present forecasts that goal may be unreachable.

The precarious nature of the bond market with well-known financial experts expressing concerns about Treasurys, suggests a gloomy foreshadowing. Moreover, the reluctance on the part of the present administration to curb its appetite for spending and its recalcitrance to consider budget retrenchment have put the financial markets in an uncertain and perilous environment.

Ultimately the market seems to be counting on a compromise over the debt limit that allows for an increase along with a reduction in expenditures. However, partisan sentiments are running high in this year before a presidential election, with each side driving their advantage for electoral support.

A recent New York Democratic victory in a congressional seat normally held by a Republican has convinced the party leaders, “Mediscare” can be a tactic for further success. If this is true, any discussion of retrenchment in this program which in itself accounts for more than half of the national debt, may be impossible.

On the other side of the ledger, Republicans eager to compromise have those in the tea party looking over their shoulders arguing that compromise is ostensible defeat. Since they have given vitality to a moribund party organization, this view cannot be overlooked.

Although this is not the time for stasis, this is what we have. Both parties are captive to their constituents and the arguments that follow from that connection.

The backdrop for this financial slowdown is related to endogenous issues of the kind mentioned in this article, but they are also related to the exogenous issues of bailouts, bank failures and sovereign debt across the globe. Chickens are coming home to roost as generous government programs undermine the incentive for and capacity of private enterprise. So many want so much from so few. The free rider is an international resident.

What this adds up to is not a pretty picture, despite present rhetoric offering a different scenario. We are at an economic precipice and decisions must be made to avoid another major crisis of the 2008 variety. The question, of course, is whether anyone has the will, the determination, to do what is necessary, even if unpopular. The test of democracy’s resilience and the fate of the financial system lie in the balance.

Herbert London is president emeritus of Hudson Institute and author of the book "Decline and Revival in Higher Education" (Transaction Publishers).

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