IONS of words have been written over the last few days about the US fiscal cliff. But few have regarded this long, slow and frankly tedious political process as in any way positive.
I disagree. The drawn-out debate that preceded this week’s agreement is likely to be the best way for America to resolve its problematic fiscal situation. Why? Because gradual but real progress may be better for the underlying economy. And unplanned crash diets rarely prove to be the best way of losing weight – even at the start of a new year. The chances of long-term success are minimal if the target isn’t agreed in advance.
Like dieting, successfully balancing a budget requires a commitment to distant goals and staying within predefined limits over an extended period of time. It’s about making fundamental choices – prioritising limited resources and trimming away any excess.
And in a democracy, this process requires a debate. This is what has been happening vigorously in the US over, for example, tax rises for the wealthy or cuts to Medicaid entitlement spending. In fact, rather than criticising the Washington system for its inability to reach an immediate decision, Europe should perhaps be emulating the openness of America’s fiscal discussion.
Many European countries maintain similarly unaffordable long-term levels of spending on public services, and are failing to remain globally competitive. The difference is that a great number of European politicians are scared of honestly informing their voters of the underlying situation.
And these same Europeans are also failing to properly debate the menu of options that could provide a sustainable solution. They may cut spending or raise taxes. But projections for the future are often ignored. David Cameron has chosen to prioritise the NHS, but will we be willing to pay more taxes to fund the cost?
Crucially, markets are largely unbothered by lengthy debate on these sticky political issues. Investors and traders seem to be willing to wait if they see progress, even if it is slow.
Central banks are currently keeping many economies afloat through low interest rates, quantitative easing and other stimulus measures. To put it bluntly, monetary stimulus is reducing the impact on financial markets of political incompetence. By effectively reducing the interest rates on US Treasuries, the Federal Reserve is ensuring that markets do not currently reflect the real risk to the American economy of Congress and its decisions – whether good, bad or otherwise.
It’s also a question of scale. Given the sheer size of America’s debt mountain, the whole country needs to be behind the solution, which will inevitably prove painful. Otherwise the US will just drift from crisis to crisis. If a vigorous political debate ensures the eventual solution is more robust, then we should embrace that discussion.
Louise Cooper is a financial analyst and founder of Cooper City.