Economic Challenges

By Steve Kopperud, Policy Directions, Inc.

I have a friend who believes all the congressional knife throwing, name-calling, and grandstanding in the United States (US) over spending, deficits, fiscal cliffs, and sequestration is just political street theater. He’s convinced all right-thinking adults understand that the economy – domestic and global – is more important than political points. His goal is to tell all who’ll listen that the House of Representatives and Senate leadership and the White House actually agree on the need to save money, cut the deficit/debt, and demonstrate fiscal restraint. The media posturing is all for show.

I think he’s correct in that the ultimate goal of controlling the budget is pretty much universal; he veers from the path of sanity when he believes there’s full consensus on how to achieve that goal.

The economic challenges consuming the US Congress now and for the next 60 to 90 days are considerable. All must be overcome if we’re to see reauthorization of a five-year farm bill, full implementation of new food safety laws, a reemergence of efforts to craft a national energy policy, completion of, or progress on, new trade deals in the Pacific Rim and Europe, not to mention immigration and corporate tax reform.

However, there’s a sliver of truth in what my friend says or at least there’s an emerging context to the latest round of fiscal fisticuffs. This emerging view seems to be more the result of a reality check than a vote count. Perhaps it’s the new post-election, laid-back President Barack Obama; maybe it’s a Republican party still stinging from its defeat in that same contest. Yet the unalloyed reality everyone seems to understand is that actions taken to cure domestic economic ills have significant implications for the United States both in maintaining that growth, however stuttering, as well as in the country’s inevitable role as a global economic backstop.

The US economic recovery is fragile, but it’s maintaining forward momentum thanks in part to a hyperactive stock market reacting more to the Federal Reserves’ “quantitative easing” than to Washington, DC. However, unemployment remains high, corporations sit on piles of cash while not hiring – they’ve learned to do more with less – and the housing market is just beginning to show signs of a robustness not seen in four years. This snail’s pace, however, must be maintained if not accelerated as southern European economies continue to founder, Great Britain threatens to exit the European Union, and no continental government hero seems willing and/or able to step in to provide adult supervision.

In Asia, economic recovery is a mixed bag. Japan remains a shadow of what it once was, while Korea is treading water. China is either on the brink of economic implosion or on the verge of a major fiscal surge, depending on the day of the week and the segment of the Chinese economy one analyzes. As for Latin America, let’s not go there; ditto the Middle East.

Experts agree the United States can’t allow itself to get distracted from the slow road to domestic recovery and global economic stability if it hopes to rekindle overall productivity and economic health. This country, they say, is too wedded to exports. Our perspective must be global, they say. The biggest distraction would be domestic political battles for the sake of political battles.

The across-the-board spending cuts mandated by the Budget Control Act – the so-called “sequester” – had not kicked in as of this writing and won’t until at least mid-April, though authorized by presidential order as of March 1, 2013. The impact of these mandatory cuts fully depends on whom you speak with and which public relations spin you buy into. The White House publicly predicts that when the full force of an approximate 2.5 percent reduction in domestic program discretionary spending hits, the country will be catapulted back to the days of the Great Depression unless we raise revenues to offset the reductions. This is a very polite way of saying increase taxes on a greater percentage of the wealthy, greenhouse gas emitters, and oil companies, among others, while closing tax loopholes and talking about entitlement program reform. The Tea Party folks and other budget hawks – they flourish in both parties – are mostly silent, privately relishing sequestration bringing about the across-the-board spending cuts for which they’ve lusted since 2008.

The White House has not submitted its fiscal year 2013 budget recommendations and is not expected to get that document to Capitol Hill until the end of March, nearly two months late. Its reason: sequestration and the continuing resolution have muddied the budget waters. While neither chamber pays much attention to the White House budget in any event, it does confirm where the Obama administration’s priorities lie. Also, the administration is being scolded for publicly overstating the impact of sequestration while not talking about how it will meet its spending cut obligations. It committed a major public relations blunder by notifying Congress it was suspending White House tours – those for which tickets are provided by members of Congress to their constituents. This prompted a Republican member of the House to offer an unsuccessful amendment to a pending spending bill prohibiting the president from traveling to a golf course during sequestration.

However, moderate voices are starting to make themselves heard, and their message is this: The US economic recovery is ongoing albeit more slowly than we’d like; we can and will do as much or more while spending what we’ve got. The Food and Drug Administration said it can maintain its programs – some programs may slow – and meet its spending reduction by cutting back on travel, “collaborations,” training, and other projects without furloughing a single employee. The Transportation Security Administration says it may have to engage in rolling furloughs – a day off without pay every couple of weeks – but airport security lines will not be miles long and take hours to complete. Meat inspection? Of course, and the US Department of Agriculture is already backing off its “we’ll be forced to shut it down” message, saying it will be months before the effects are felt.

Congress was expected to punt the sequester can into summer by including a new deadline extension in its most recent continuing resolution to replace the current continuing resolution that funds government operations at fiscal year 2012 levels. Now it appears the cuts will remain in place no matter the overall funding scheme.

As I write this, the House has passed a continuing resolution to keep the government running through September 30, the end of the federal fiscal year. This means every department and agency will operate on the same budget as it did the year before. All funds are intact, including the Market Access Program and the Foreign Market Development Program. In place is the one dollar per gallon blender’s tax credit for biodiesel and renewable diesel. In addition, the House included in the budget bill expanded funding for the Department of Defense and military construction because of the sequester. The Senate will likely modify the House bill to include more individual funding bills that provide greater flexibility for agencies and departments to move money around while still meeting their spending reduction mandate. This means the spending cuts stay, but the government will not shut down.

Both chambers will produce by April 14 fiscal year 2013 budget resolutions for the first time in nearly six years, based on Congressional Budget Office spending projections expected to be delivered to them in mid-March. While the House has consistently produced its blueprint for federal spending, the Senate has not. It’s also expected the overdue White House budget will be on the Hill as well.

This all adds up to the price to be paid for trying to reverse a high-speed vehicle without first slowing down. Both sides of the aisle appear to have embraced the notion a 2.5 percent reduction in overall discretionary domestic spending with added flexibility, while providing defense protections, is a small price to pay to keep the US economy trekking upward.

April 2013 RENDER | back