Tuesday, November 22, 2011

When leaders fail to lead

Business Times - 23 Nov 2011

When leaders fail to lead

America's politicians have not been able to muster the will to make unpopular and painful decisions


TO no one's surprise, the US congressional Super Committee ended its effort to put America's fiscal house in order ended with a whimper. The Democratic and Republican members of the special deficit-reduction committee admitted that after three months of work, they had failed to meet the deadline for an agreement on cutting about US$1.2 trillion from the US national debt - which topped US$15 trillion last week. The mountain could not even give birth to a mouse.

In a way, not unlike their counterparts in the eurozone, the members of the America's political class have not been able to muster the will to make the unpopular and painful decisions that require slashing government spending (by eliminating public services) and raising new revenues (by increasing the tax burden), displaying once again a profile of political cowardice.

In Greece and Italy, the politicians have decided to shift the responsibility for making these choices to a group of apolitical technocrats. In Washington, the politicians had first tried to square the fiscal circle through the creation of the bipartisan Super Committee.

The move came following the political and legislative battles of the summer over the issue of raising the debt ceiling and the decision by the credit agency Standard & Poor's to downgrade US debt after concluding that 'America's governance and policymaking is becoming less stable, less effective'.

The 12 respected Republican and Democratic lawmakers in the Super Committee were granted enormous legislative power to fashion a plan that had to win only seven votes and then be either rejected or approved - but not altered - by Congress before the end of this year.

But the deep ideological divisions between the Democrats and the Republicans that were on display during the debate over the debt ceiling has made it also impossible to overcome the differences between the representatives of the two political parties in the Super Committee.

Indeed, the stalemate in this deficit reduction body only helped to accentuate these differences as the two sides tried unsuccessfully to chart a common fiscal policy. The Republicans members insisted that most of the cuts in the debt would have to come from reducing spending on cherished social and economic programmes - including the government-backed retirement and health insurance plans - and that a very small amount of government revenues involving a few changes in the tax rates will contribute to the deficit-cutting process.

But the Democrats rejected any major cuts in the Social Security and Medicare programmes without corresponding increases in taxes on the wealthy, including by eliminating the tax cuts on households making more than US$250,000 a year that were enacted during the administration of former Republican president George W Bush.

While a failure to resolve the debate over the debt ceiling in the summer could have forced the federal government into bankruptcy and devastate the financial markets, the current Congressional deadlock should have only limited short-term economic impact. The lawmakers had ensured that if the Super Committee had failed to reach a compromise, a set of automatic trigger mechanisms would lead to US$1.2 trillion in cuts next year, divided almost equally between domestic and defence spending.

Yet some Republican lawmakers are trying now to make those automatic trigger mechanisms less, well, automatic, by proposing new legislation that could save the defence budget from major cuts. Defence Secretary Leon Panetta has also argued that US military capabilities will be undermined by the proposed reductions to the Pentagon budget.

In any case, Democrats and Republicans have already started to blame the other side for the failure on the part of the Super Committee to reach a deal. Both sides - and that includes Democratic President Barack Obama - are planning to turn the debate over how to reduce the federal debt into the central theme of next year's presidential and congressional elections.

'Fairness' agenda

The White House and the Democrats are hoping that a changing public mood, reflected in the support for the Occupy Wall Street Movement, will be more in tune with their 'fairness' agenda that stresses the need to change social economic priorities by getting the wealthiest one per cent of Americans to help support a long-term plan to cut the federal deficit and ensure that the interests of the members of the middle class (the 99 per cent) will be protected in the process.

Republicans, on the other hand, continue to espouse the anti-Washington rhetoric of the Tea Party movement and argue that only drastic cuts in government spending would resolve the deficit crisis; and that raising taxes on Americans will only diminish economic growth and constrain the ability of businesses to increase production and hire new workers.

If President Obama and the Democrats are expected to portray the Republicans as the puppets of the 'fat cats' in Wall Street, the Republicans will accuse their political rivals of protecting the interests of the 'bureaucrats' in Washington.

Hence, each side is hoping that the results of the 2012 election will provide the political mandate that it needs to pursue the kind of fiscal policies that are in line with the interests and the values of most Americans.

From that perspective, the Super Committee may be ending its work with a whimper. But its failure also marks the start of an election campaign that may - or may not - end with a big political bang.

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