“A few right wing nutters…” well said Vince Cable

Dr Cable appearing on the Andrew Marr Show, Sunday 25^th, responded in his typical frank fashion to the question “what is the biggest threat to the global economy” with the comic and characteristically candid comment, “a few right wing nutters in the US congress”; this offended the Tory establishment but it certainly had some truth to it. If the Americans can’t agree on fiscal policy and raise the debt ceiling by the 2^nd August then all sorts of bad things could come to pass.

So why can’t they agree? Two reasons spring to mind: Firstly, the nature of congress means it is harder to pass bills (i.e. policies) in the American congress than in the U.K House Of Commons as members of congress can quite easily vote against a bill and stop government working; in Britain, the incumbent government has a voting majority for the five year parliament, hence any number of laws can be passed as long as the government MPs vote with the government; a likely possibility. Secondly, the recently elected republican congressmen hail from the far right tea party movement, this part of the Republican Party has a fetish like obsession with not raising taxes and cutting spending; thus these individuals are refusing to vote on a bill which would raise the debt ceiling and taxes.

This doesn’t sound too ridiculous until one considers the gravity of the situation. If congress fails to vote for an increase in the debt ceiling then the US has to decide who not to pay: pensioners, public servants or debt holders; a truly horrid choice. The worst choice would be to stop servicing debt. However if this were to occur then the ratings agencies would have no choice but to devalue American debt from its AAA status, it could even be classed as a technical default. The tragic irony for the tea party would be that by adamantly opposing a rise in the debt ceiling, they would actually cause a rise in debt as the increased risk would be reflected in the price of treasury bonds. And besides, the raising of the debt ceiling is to pay for spending already accounted for, not for new spending as is popularly misconstrued.

Probably not but it goes down well with the tea party

Standing from afar, it seems most baffling that common sense and arithmetic do not prevail. According to The Economist, “America’s tax take is not high either by international or historic standards”, worse still, tax cuts in a country already divided by huge inequality, inevitably impacts on the poorest hardest and most infuriatingly for the non-partisans amongst us, the tax cuts for the rich don’t even have as much impact on economic growth as spending on the poor. For instance, it is hard to argue that food stamp recipients are part of the ‘undeserving poor’, according to The Economist, “about 50% are children, 8% elderly and 18% have no income at all”. Furthermore, Moody’s Analytics assessed different forms of stimulus and found that food stamps were the most effective; raising economic activity by $1.73 for every dollar spent, followed a close second by unemployment insurance at $1.62. This contrasts with tax cuts which yield, “a dollar or less”.

The republicans are counting on Obama taking the blame for a debt default, after all, he is the one sat in the oval office refusing to lower taxes and decrease spending. However, the republicans’ main argument is that Obama is enforcing a socialist regime on an unsuspecting American nation, the reality is that the republicans are using the spectre of default to enforce their own radical ideology on the American people and this is without winning control of the White house, the senate, and most of all, the argument. 

Further information on food stamp recipients can be found at: http://www.economist.com/node/18958475