Monday, August 8, 2011

London burns but worse economic fires may spread from US debt crisis

While London burns in the worst riots since the 1980s, a potentially more dangerous fire threatens to spread from the debt crises in the US and Europe.

Londoners will shun the mindless thuggery of looters and even those with genuine grievances over lack of employment are unlikely to take to the streets as they did violently in Greece and more peacefully in Spain.

Theresa May, the home secretary, has attempted to deny that there is any connection between the riots and the economy, rather than over the shooting of a north London man.

In private, however, I’m sure May would admit that what is happening on the streets of Europe is linked to the economy as concerns increase over the spread of the debt crisis to Italy and Spain after Greece, Ireland and Portugal have already been bailed out.

While Europe riots, American citizens are nervously watching stocks tumble, and wondering no doubt if S&P’s downgrade on Friday is the trickle that becomes the flood of another global economic meltdown.

S&P decided that the $2.5trn in cuts over the next decade would be insufficient to maintain the USA’s triple AAA credit rating. Neither the Republicans nor the Democrats welcomed the decision which was criticized by Bill Miller, chief investment officer of Legg Mason Capital Management, in the Financial Times as “precipitate, wrong and dangerous.”

During the pantomime of brinkmanship in Congress, criticized more forcefully by China which holds $1.6trn in US debt, the focus was on spending cuts. And as S&P’s downgrade exposed, spending cuts do not increase revenues.

Joel Brinkley, a Pulitzer Prize winning former foreign correspondent for the New York Times, likened the GOP’s inability to compromise to Middle East hardliners.

Until today, there was one little word very noticeable by its absence from the debate except from commentators like Robert Reich or the FT which tried to put a positive spin on the impact of the S&P downgrade:
With luck, it will spur US policymakers to act more responsibly and intelligently in confronting the country’s long-term fiscal challenges.

Congress should act to guarantee that this episode will never be repeated. The law creating the debt ceiling itself needs to be repealed.
Reform was a word that did not fall from the lips of US politicians on either side, until today. But apparently the word reform came as President Barack Obama tried to calm the markets today:

@whitehouse Obama: Need to combine spending cuts w/ tax code reform that asks wealthiest to pay fair share & modest adjustments to health care programs.

He also acknowledged that the damaging debate over the debt limit was puzzling to political administrations outside the US.

Obama's words failed to soothe the fears the markets of course. Investors want to see action, including changes to the US tax code.

Even casual observers can see that the tax code is in disarray in the US – too prone to the demands of special interests. Congress has managed to tie itself in knots that are going to be almost impossible to untie without radical reform.

The New York Times argued in yesterday's editorial that tax increases were essential to any meaningful attempt to lower US debt. It claimed that the Bush tax cuts cost an unbelieveable $1.8trn from 2002 to 2009 and that each year $1trn is given in tax breaks - but I haven't heard much about this from the Democrats. Are they happy to watch Obama carry the can? It even called for a value-added or carbon tax …

Unlikely as that kind of tax reform may be, deeper reforms are needed that go further than trimming the frayed edges of the tax tangle: experts such as Reich point out that tax rates are lower than they have been since 1942 and New York Times letter writers point out that: “In 2010, individual taxpayers paid $898.5 billion in income taxes and companies paid $191.4 billion.”

Does the Democrat compromise on no increases in taxes mean that they might have well signed Grover Norquist’s terrible pledge – and how quickly must they have regretted it after the S&P announcement? As the New York Times acknowledged at the weekend; Republican intransigence is predictable but the lack of push back from the Democrats is astonishing.

Public participation in the US means that those who are heard the most already have the most power/money to push for their own piece of pie.

The US is yet to see protests or even riots as we’ve seen on the streets as London, Athens and Madrid, but perhaps it’s only a matter of time.

Culturally Americans tend to be less impassioned about politics than their European cousins, Paul Saffo argued in Sunday’s San Francisco Chronicle. Lack of informed opinions makes Americans less inclined to talk politics than Europeans, he said.

But I would go further and say that the lack of reliable, impartial information makes it almost impossible to form reasonable opinions about anything. MSNBC is a great media outlet – but it works mostly as a counterpoint to Fox, etc. And NPR does not have enough reach or support to have the same impact as the BBC.

The tax equity market is the lifeblood of renewables investment in this country. But if revenues are low, investments are correspondingly low. For the past couple of years the industry has been boosted by the renewable energy cash grant. But that is just one of the clean energy measures in the firing line after last week’s deal. But cutting federal investments in key areas such as clean energy without any strategic alignment with other policies is a fool’s game.

Republicans must stop forcing the Democrats into damaging compromises over the economy. Politics may be a circus, but clowns should stay out of the ring when the lions roar.

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