Perfect economic storm set for after the election

Tom WestA perfect storm is brewing on the horizon, and I’m not talking about the environment. It’s “perfect” in several ways, but from a political point of view the Democrats and Republicans may secretly go for it because it gives them both an out — they can blame the other side, just as they have been doing for years.

However, this time, there will be some legitimacy to both their arguments.

Further, it is “perfect” to the politicians because its effects won’t take hold until after the next election.

Here’s how it works:

You may recall that last summer the Congress reached a deal postponing a crisis over the debt ceiling. Part of that deal formed a bipartisan supercommittee to come up with a plan for reducing the deficit. Of course, that resulted in nothing.

Without the cuts, the Republicans demanded, and President Obama agreed, automatic massive spending cuts will take place in January 2013.

Meanwhile, expiration of federal unemployment emergency benefits will kick in at the same time.

That’s all on the spending side, thus giving Democrats apoplexy, but, more importantly, material with which to bash the Republicans when the economy inevitably slows.

At the same time, expiration of the recently extended payroll tax cut will also kick in, as will the expiration of the so-called “Bush tax cuts,” a long-time goal of the Democrats. This will cause

Republicans to foam at the mouth, but, more importantly, give them substance to blame the Democrats for the end of economic growth.

Today, economists are predicting that the U.S. economy will grow 3 percent in 2013 — if tax and spending policies remain unchanged from today. If the perfect storm comes to pass, however, projected growth in 2013 will drop to 0.2 percent.

That could push up joblessness and create more social unrest. However, many moderates have said the solution is a combination of spending cuts and tax hikes. They were thinking in terms of some “Grand Bargain” being struck between the warring political parties, but this is democracy. It won’t be all tied up in a nice, neat bundle. It will be messy, and, unless voters decide to give power all to one political party, it will give the incumbents some cover.

What will the newly elected Congress and president do? Most likely, if the past is our guide, do everything possible to put off the day of reckoning without fixing the problem. At some point, however, the nation will have to address its growing debts. Eventually, without spending restraint or higher taxes, interest rates will have to go up to continue spending dollars we don’t have.

Either that, or the nation will go bankrupt when investors decide we are a bunch of deadbeats who aren’t serious about paying back what we owe. They will take their money and invest it in other lands where they can get a positive return. The longer the reckoning is put off, the worse the downturn will be.

We are seeing this playing out in slow motion in Europe today where the debt problem is much greater. Since the global economy is all tied together, the Europeans  could well add to our woes here, and may not be able to wait until after our election is past.

Peter Coy, writing in Businessweek last month, recalled the old Woody Allen joke: “One path leads to despair and utter hopelessness. The other to total extinction. Let us pray we have the wisdom to choose correctly.”

Last week, I mentioned here that the ECM Publishers Editorial Board had met with state of Minnesota Economist Tom Stinson in mid-March. It was Stinson who brought this “perfect storm” to light.

Everyone at the state capitol was in good spirits because the February budget forecast had projected a $323 million surplus. Only $5 million more was needed to fund fully the state’s budget reserve funds. Those funds are needed in case of a downturn and to cover cash flow during spending spikes.

The Republicans have since passed a bill trying to use the remainder of that projected surplus to repay the state’s public schools for some of the payment delays it placed upon them.

Governor Mark Dayton vetoed that bill, causing much gnashing of Republican teeth, but, given the likelihood of a budget crisis in Washington, the real question is whether having just over $1 billion in cash flow and budget reserve accounts is sufficient. The Republicans think it is; Dayton thinks not.

Stinson said that he doesn’t expect the economy to add a ton of jobs any time soon. He said, “It will be 2014 before the U.S. gets back to the number of jobs it had at the start of the Great Recession.”

Part of the challenge the United States faces, Stinson said, is how to grow productivity in the face of a dumbing-down of the work force. He said that 92 percent of the people retiring today have high school diplomas, but that only 76 percent of the adults coming into the work force have graduated from high school. “We have tragic graduation rates,” he said.

Nobody likes austerity, but the “perfect storm” may be the only way out of this mess. That, and finally coming to grips with our entitlement mentality.

We can’t have self-government without self-responsibility, and that includes operating our government at a size so that it and all of us individually can remain solvent.

Tom West is the general manager of the Peach. He may be reached at (320) 352-6569 or by e-mail at tom.west@ecm-inc.com.

up arrow