‘We’re still fighting our way back’

Washington: In the post-crisis global economy, 2013 may have begun well for the  United States with a slightly accelerating pace of its post-recession recovery as reflected in gains in domestic demand, consumer spending, manufacturing, output and, more importantly, the revival of the collapsed housing market over the first five months of the year. With lower mortgage rates, housing market has staged a sharp recovery with a surge in prices and increase in new home sales.
But the fiscal gridlock in Congress continues, making no difference to President Obama’s triumphant re-election in November last, with Republicans determined to focus more on alleged scandals surrounding his second Administration than on shaping a balanced budget keeping the perspective of a sustained deficit and debt reduction plan over a decade such as would promote growth and jobs.
US markets, however, have broadly remained on uptrend in recent months, thanks to Fed’s accommodative monetary policy, and business optimism is also growing, albeit gradually. This is notwithstanding the spending cuts enforced by the Republican majority in the House of Representatives – dubbed ‘sequester’ of the order of 984 billion over ten years – which IMF Chief Christine Lagarde called ‘self-inflicted fiscal wounds’ for US recovery.

IMF has been supportive of a balanced approach to deficit reduction with both spending cuts and revenue, the Obama Administration has pursued, but Republicans have blocked his budget proposals, though the President was initially able to manage $600 billion revenue in a bipartisan deal. That helped save the economy ride over a looming ‘fiscal cliff’ at the start of the year. The Fund has also noted ‘good progress’ in fixing US financial system and a steady increase in private demand, driven by the recovery in housing sector and automobile industry and easing financial conditions. Falling gasoline prices have also benefitted consumers

But the $16-trillion is not doing as well as it could, and should, so that it could not only grow strong and create more jobs at home but also drive global growth. This is because of strong fiscal consolidation built in, equivalent to 1.8 per cent of GDP. Growth in the first quarter (January-March) was 2.4 per cent after 1.75 per cent in the last quarter of 2012.  IMF has projected growth close to two per cent this year and three per cent in 2014. The negative effects of the sequester are yet to show up IMF growth assumes a medium-term fiscal adjustment evolving without deep cuts in vital programmes and providing room for the needed recovery of private demand. But, there seems to be little hope for it at present.

For a party with its inveterate dislike of this President, who confounded it by the popular support he commanded for his second term, and continues to enjoy favourable ratings in spite of its righteous indignation plays over some questionable developments, any bipartisan deals like grand bargains on budget, debt ceiling and tax reform must be discounted at present. Nor even lesser accords on new laws on immigration or gun control seem likely to emerge smoothly – issues on which the Republicans are themselves are widely split.

Six months into his second term, the President suddenly looks adrift in the face of ‘scandals’, hurled at the White House though he has fairly responded to the accusation against the Internal Revenue Service (IRS) on its focusing on Tea Party Conservative group to delay tax exemptions as well as on a charge of Justice Department prying into journalist secrets. Characterising the IRS development as ‘outrageous’, the President had promptly initiated departmental actions.

President Obama is, however, urged by political analysts and scholars to revert with renewed vigour to the transformational themes he had unfolded at his inauguration as second term agenda. Meanwhile, the President can rightfully claim the considerable advance on the economic front, given the successes in rescuing the nation from a long and ‘punishing’ recession or in putting through a well-regulated financial structure, besides reaching health care benefits to uninsured and aged poor patients.

Fighting its way back from an economic crisis, President Obama noted in his weekly address on June one that the country’s businesses have created nearly 7 million new jobs over the past three years with 500,000 of them in manufacturing.  ‘We’re producing more of our own energy, consuming less imported energy, and the housing market is coming back.  The stock market has rebounded.  Our deficits are shrinking at the fastest pace in 50 years.  People’s retirement savings are growing again Rises in health care costs are slowing. The American auto industry is back

While the economy is picking up steam, the President says, ‘we need to build on the progress we have made over the last four years’. He no doubt remains focussed on his broader objective of middle class uplift with jobs and skills as the engine of future growth in America. Yet, leading political voices keep urging Mr Obama not to be deterred by Republican witch-hunting but keep the larger picture before him while seeking solutions to major domestic problems.

IMF has welcomed the accommodative monetary policy (Quantitative Easing) of US Federal reserve – and also endorsed the aggressive easing in Japan, more recently, to emerge out of its prolonged deflation as part of Prime Minister Shinzo Abe’s new economic programme for growth – with the objective of speeding up recovery of stagnating economies and bringing about significant reduction in US unemployment. With a job addition of 175,000 in May, matching expectations, the unemployment rate was still stuck at 7.6 per cent.

Mr Ben Bernanke, Fed Chairman, says QE could be reduced gradually when growth gains more traction and unemployment gets lowered to 6.5 per cent.  The near zero Federal Funds rate will also be maintained well into next year. Both IMF and OECD see the need for the Fed to ‘carefully navigate’ through the completion of quantitative easing. Any premature exit, OECD said, could ‘ jeopardize the fragile recovery, but waiting too long could result in a disorderly exit from the program with sizable financial losses’.

The QE3 was brought in by Fed last year to help the economy (and the housing market) recover and bring down the unacceptably high unemployment. Countries like Brazil, China and India, had raised a hue and cry over the possible negative effects on other economies, such as volatile capital flows, from US Fed’s monetary easing. These have not been borne out till now. Chaiarman Bernanke said QE was necessary to help boost private demand and economic recovery. It has had beneficial effects on the US economy and it would hold good till growth is strong enough to have a significant impact on unemployment. The policy would do good not only for growth and jobs in USA but also help global growth. IPA

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