OECD Lashes Out at U.S. Budget Trouble to No Avail

global economy
global economy

The Organisation for Economic Co-operation and Development (OECD) is the latest organization to attack the budget freeze in Washington. Like the International Monetary Fund (IMF), World Bank and scores of groups that are considered politically independent, the OECD believes an American default or long-term inaction on the budget will hurt not only the American economy but quickly spread worldwide. However, Congressmen who barely listen to voters and are unswayed by polls will not even look at the OECD's statement.

According to the new OECD report:

In the U.S., the sequester has already resulted in a large and arbitrary fiscal consolidation, and this is now being compounded by the shutdown. But the consequences of failing to raise the debt ceiling would be much worse. Government consumption would have to shrink immediately by at least 4 percentage points of GDP, subtracting a similar amount from GDP growth in 2014. A default on government debt would result in an even more serious outcome. Even if the likelihood of this is low, just the uncertainty about the government's ability to avoid a default on part of its debt would result in disruptions in financial markets that would deepen the economic downturn, lowering tax revenues and forcing more cuts in public spending. We would also expect to see serious stresses in the banking system at a time when the federal government would not be able to offer emergency assistance. Unemployment would rise back to levels seen in the wake of the financial crisis.

The OECD report authors do not say where they got the 4% number, but if it is right, a new recession would be deeper than the last one.

There are two problems with reports like the one from the OECD. The first is that they may not be entirely correct. A failure to raise the debt limit may only last a few days. The U.S. government may have to pick and choose which bills it pays for a few days. In the process, Congress and the administration may discover which programs have an effect on the economy and which do not. This will not mean those with little economic effect are not important in terms of their contribution to Americans and the institutions that support them. It does mean their links to gross domestic product (GDP) are small or do not exist at all. That potentially makes them future victims of cuts in government spending — cuts that the outside world has hoped for years would happen. With those cuts comes a chance for America to balance its budget.

The second problem with the OECD statement, and others like it, is that organizations that do not have a direct involvement in government do not have any leverage with those that do. An abstract description of how the world will change if the United States fails to act on its financial problems is just that — abstract. Members of Congress and people in the administration have to grapple with outside powers, not the least of which are those individuals and organizations that fund their chances to be re-elected. After all, for politicians getting elected is just as important as anything else. Reading OECD reports is not.

Filed under: Politics

Originally published