x Abu Dhabi, UAEWednesday 24 January 2018

Political gridlock is sinking more than a US budget

Last week, the US President Barack Obama unveiled his budget for fiscal year 2011. It weighed in at $3.8 trillion, slightly smaller than China's annual economic output.

Has Washington gone mad? Sadly, no. What's more, America's Congress and its members - craven, but sane enough - show no sign of going anywhere. Last week, the US President Barack Obama unveiled his budget for fiscal year 2011. It weighed in at US$3.8 trillion (Dh13.95tn), slightly smaller than China's annual economic output, and includes a $1.6tn shortfall, followed by deficits of $1.3tn in 2012 and a total of $8.5tn over the next 10 years.

By the end of the decade, America's public debt, at 77 per cent of GDP, would be at its highest level in six decades. Mr Obama frequently and justifiably points out that debt financing on such a vast scale was necessary to repair the damage done to the US economy by his predecessor. According to The New York Times, roughly half of this year's shortfall is due to the initiatives of the former president George W Bush; in particular his tax cuts, his wars in Iraq and Afghanistan, and his unfunded mandate to enlarge a national drug programme for the elderly.

The Times attributed only 10 per cent of the deficit to Mr Obama's nearly $800 billion stimulus measure passed a year ago to keep the economy afloat, in addition to other incumbent programmes. Nevertheless, the Obama budget, and Congress's response to it, is less a spending plan than a portent of national bankruptcy. Last Tuesday, Moody's Investors Service warned that America's "Triple A" sovereign credit rating was in jeopardy. Either engineer a robust economic recovery, Steven Hess, the Moody's senior credit officer, told Washington, or demonstrate to the world you are serious about fiscal consolidation.

To the surprise of no one, Mr Hess's remarks failed to register with America's politicians, who would surely indulge in partisan bickering even as they steered the ship of state towards insolvency. Consider: by the end of last week, it was clear that Mr Obama's efforts to form a bipartisan commission that would hammer out ways to reduce the deficit was going nowhere after Congressional Republicans - the party of fiscal restraint, mind you - declined to participate.

The reason? Republicans fear such a commission would give the president and his Democratic party political cover during this year's midterm elections. The defence secretary Robert Gates has warned the elected politicians against restoring funds to weapons programmes he wants cut. They include a $2.5bn programme to build 10 C-17 cargo planes the air force says it does not need, but production of which generates some 30,000 jobs. Last week, the Republican senator Kit Bond, whose home state of Missouri produces C-17 cargo doors, warned that ceasing production of the aircraft would leave the US at the mercy of "Russia or other foreign countries" for its airlift needs.

The proposed US defence budget - at $712bn, including war spending - is equal to half of what the rest of the world spends on national security and represents a slightly smaller outlay than the GDP of Turkey, the world's 17th-largest economy. The Obama budget calls for an end to a programme that would restore lands at abandoned mines that have already been cleaned up. This is the president's second attempt to cut the initiative. Last year, senators from both parties whose states are on the receiving end of the programme managed to keep it running.

The veteran reporter for The Wall Street Journal Gerald Seib devoted his column last week to the national security implications of Washington's reliance on foreign lending, particularly from China, whose interests diverge from those of the US as much as they converge with them. A day later, a senior official from China warned Mr Obama against meeting the Dalai Lama, the Tibetan spiritual leader whom Beijing regards as a subversive, lest it would "damage trust and co-operation between our two countries, and how would that help the United States surmount the economic crisis?"

One would think that a veiled threat of economic sabotage, that Beijing would begin dumping its vast holdings of US securities if the meeting goes ahead, would compel legislators to set aside their partisan rancour and craft a thoughtful approach to fiscal recovery. Apparently, one would be wrong. The budget debate that will consume Congress for the next several months will be remembered for its futility.

By precluding any chance of comprehensive tax increases, as Republican leaders have pledged to do by filibuster, they have torpedoed any chance for the kind of entitlement reform that will be needed to contend with the next crescendo of debt, the one that will come with the baby-boomer retirement wave and the enormous stress it will place on the country's federal health and insurance schemes. Economists estimate the costs of such a burden in the tens of trillions of dollars.

The US has reached an inflection point. Chronic deficits, the wages of political gridlock, are now an all but permanent vital sign of the US economy. The rest of the world will take note and adjust accordingly. @Email:business@thenational.ae