Congress and its Road to Nowhere

By Peter Lindfield, published in the Telegraph-Journal 24th August 2012

This year, on Nov. 6, Americans will once again head to the polls. The outcome of the 2012 general election will be critical for the future of the U.S economy. The race for the White House has occupied centre stage in the media, but the Congressional elections will play an equally prominent role in determining whether the U.S. will establish a new growth trajectory in coming years or if the economy continues to languish.

Ask American voters what issue is of greatest concern to them and most will respond that the economy is top of mind. Almost four years into the quasi-recovery, economic growth has again stalled. Unemployment continues to punish many Americans. Fewer than half of the nearly 8.8 million jobs lost during the recession have come back, and more than 12 million Americans are still looking for work. Millions more part-time workers have had their hours reduced. The average period of unemployment has risen from 17 weeks in mid-2008 to 39 weeks.

In recent months, growth further slipped as business and consumer confidence has weakened, industry hiring has stalled, household spending has cooled, manufacturing production has slowed and business investment in capital equipment has retreated. The eurozone crisis and a persistent lack of confidence in fiscal and regulatory direction have magnified the uncertainty that is holding the country back.

By year end, Congress will have to make some difficult decisions on a range of tax and spending cuts that are scheduled to expire. Congress needs to take into account the nation’s long-term fiscal challenges, but Congressional legislators repeatedly have failed to respond to these challenges.

There is a consensus inside the Beltway that the development of a credible medium-term plan for controlling deficits should be a high priority. Congress, however, has been more adept at inaction and counterproductive political machinations that they have at addressing problems that are affecting millions of Americans. Doing nothing has become Congress’ stock in trade.

The U.S. will incur even greater economic damage if it goes over the so-called fiscal cliff, a combination of tax hikes and spending cuts that in early 2013 threatens to produce a short and sharp recession followed by rising unemployment throughout the entire year.

By a Congressional Budget Office (CBO) scenario, America’s tax and spending framework will change suddenly by Jan. 1, 2013. Taxes will increase by about $400 billion with the expiration of a combination of range of tax cuts

Spending will decrease by about $100 billion as the Budget Control Act, which reduces discretionary spending, coincides with reduced unemployment insurance payments.

A substantial portion of these tax cuts were initiated by George W. Bush to reduce the tax burden on the wealthy, and these cuts and expenditure reductions will have a severe effect on an economy that is managing only marginal growth. Without Congressional action, the CBO estimates that unemployment could increase to nine per cent and real GDP could fall by approximately three per cent in the first half of 2013. The double-dip would no longer by hypothetical.

There exists a broad public consensus that Congress needs to take action on the economy. But there is nothing like a Congressional agreement on how to get there. The Republican strategy in Congress has been to discredit President Obama, even if there are no benefits to anyone.

That strategy has meant maintaining the status quo when clear action is necessary. Because many Republicans have admitted this outright, it represents nothing less than ambitious vindictiveness on a grand scale.

The costs of Congressional gridlock will not be borne only by Americans. As America’s largest trading partner, Canada will pay a heavy price for Republican political intransigence. The November 2012 election will be almost as important for Canadians as for Americans.

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