Nouriel Roubini's Global EconoMonitor

U.S. Has Been Let Down by Its Leadership

The deal reached in Washington on New Year’s day prevented the US economy from falling off the so-called fiscal cliff. However, given the dysfunctional nature of the American political system, it won’t be long before there is another crisis.

Two months, in fact. If no action is taken by March 1, $110bn of spending cuts will commence. At about the same time, the US will hit its statutory debt limit, known colloquially as the debt ceiling.

That is only the beginning. Later in 2013, and not before time, a bigger debate on medium-term fiscal consolidation will begin. This will lead to another dispute between Republicans, who want to shrink the size of the federal government, and Democrats, who want to maintain it but are unsure how to pay for it.

So expect a big fight about entitlements, and a series of little fights over tax reform: should the US introduce a value added tax? A flat tax? Higher (or lower) income taxes? A carbon tax? Should we close corporate tax loopholes to raise more revenue? It’ll soon get messy.

President Barack Obama and his allies will argue that the deal concluded on Tuesday raises only $600bn of revenues over 10 years rather than their initial target of $1.4tn – and therefore there is further room for tax rises, at least for the wealthy. Republicans will argue that spending should now be radically cut, since this week’s deal did not address that side of the national balance sheet. (Even the 2011 debt ceiling deal reduced prospective spending by $1tn).

In the meantime, the likely fiscal adjustment in 2013 will be about 1.4 per cent of gross domestic product. (Spread between the expiry of the payroll tax cut, the increase in the tax rates of the rich, and some eventual cuts to spending.)

This translates into a 1.2 per cent of GDP drag on the economy during the year. If the economy was happily growing above trend – at say 3.5 per cent – that would not be such a big deal, as growth would still be above 2 per cent. In the past few quarters growth already averaged about 2 per cent. So the US could quite easily come perilously close to stall speed this year – or worse, if the eurozone crisis worsens.

The longer-term picture is bleaker still. The reality is that America is yet to wake up to the full extent of its fiscal nightmare. Even the typical Republican voter is not – being on average older and poorer than a Democrat voter – in favour of gutting the welfare state. Tea Party extremists are more noise than signal. That is why the plans of Mitt Romney and Paul Ryan, the Republicans’ losing presidential ticket, postponed all the tough spending cuts on Social Security and Medicare by a decade.

Neither Democrats nor Republicans recognise that maintaining a basic welfare state, which is right and necessary in our age of globalisation, rapid technological change and demographic pressure, implies higher taxes for the middle class as well as for the rich. A deal that extends unsustainable tax cuts for 98 per cent of Americans is therefore a pyrrhic victory for Mr Obama.

For now, he is being helped by the quiescent financial markets. It will probably take years for the US to confront the reality of its fiscal position and raise revenues to a level sufficient to fund a reformed – but not gutted – welfare state. Large fiscal deficits will remain the norm for the next few years, at least so long as the bond market remains quiet, as I believe it will.

Bond market “vigilantes” have no appetite for destruction. Why should they? Growth is low and inflation lower; the US still has the global reserve currency; US Treasuries remain haven assets; interest rates are at zero; the US Federal Reserve is committed to QE; and China and other emerging economies will keep accruing US dollars to resist appreciations in their own currencies. All this guarantees the cheap financing of the US deficit for years to come. But eventually, the vigilantes will wake up.

In short, the “mini deal” on the fiscal cliff dodged all the important questions. By not including spending cuts in the deal, the Democrats have emboldened Republicans who are determined to slash taxes but lack a plan to pay for it. It is again up to Washington’s policy makers to fix the problem before the market does it for them. Tuesday’s deal suggests this will not happen with any ease.

This post originally appeared on the FT and is reproduced here with permission. 

22 Responses to “U.S. Has Been Let Down by Its Leadership”

SchofieldJanuary 3rd, 2013 at 11:26 pm

Here’s how economic reality now stands in Western economies:-

“Private banks don’t have to pre-fund economic expansion only the government but when the private banks make lousy bets forget the pre-funding.”

Here’s how reality now stands in Communist run China:-

“State owned banks don’t have to pre-fund economic expansion or the government but when these banks make lousy bets the Central Bank rolls-over or cancels their non-performing debt portfolios.”

Economic analysts are predicting China’s GDP will shortly overtake that of the United States.

carlyleJanuary 4th, 2013 at 3:02 am

Americans must learn that the opposite of stimulate is depress.The example of the falling economies of Europe does not seem to register. We need the fear and panic of a bottom. With enough fear, the minions of the wealthy will abandon their owners and will be ready for a new deal. Lacking a progressive party, we will have to wait as Obama gets us to the bottom slow but steady. Romney would have had us there quicker.

David WishartJanuary 4th, 2013 at 2:28 pm

Attempting to balance the federal budget is counterproductive. Every instance in U.S. history where the budget was balanced or in surplus was immediately followed by a depression, except the most recent episode which was staved off a few years by a housing bubble. The private sector needs the government to run a deficit in order for the private sector to accumulate financial asset savings beyond what other agents in the private sector are willing to borrow. Rising deficits increase the financial wealth of the private sector. Surplus budgets on the other hand extract financial wealth from the private sector. A sovereign government with its own currency can't go bankrupt, so the only constraint on spending is inflation. But with an aging population who will be cutting back spending and deleveraging, it means inflation is a non issue. So trying to reform entitlement spending (a nominal but not real economic cost) is a destructive process that will make the U.S. economy weaker as its citizens income shrink over time.

NateJanuary 4th, 2013 at 10:33 pm

Thanks David for saying that keynesian myth, if you repeat it over and over it might sound more true, maybe you should read Roubini's book. The only way our current system of endless debt survives is by having the reserve currency as stated by Roubini above. Some day China will decide they want to buy their own stuff and increase their own standard of living instead of trading it for worthless dollars. When they call the bluff on our Federal Reserve ponzi scheme then you will see what happens when the money printing press creates runaway inflation or you stop the press and then you get a situation like Greece.

DaveJanuary 6th, 2013 at 12:04 am

You don't think that China issues their own currency as the US does? You don't think that China runs the same "Ponzi Scheme" as you call it, as the US does. Get freakin' real dude.

David WishartJanuary 7th, 2013 at 2:39 pm

If China starts to sell its dollars and begin exporting less to the U.S. it will actually cause the U.S. government deficit to shrink or increase the savings of the U.S. private sector. U.S. imports fall and exports rise, U.S. begins creating more jobs because the advantages of buying goods from China declines because their labor and the Renminbi are no longer cheap. But the exports of the U.S. are more technological and less resource intensive in nature generally, so these exports represent a lower real cost in terms of natural resources to export. The U.S. isn't part of a monetary union, so it won't turn in to Greece (not to mention its economy is infinitely more broad and deep than Greece). And Quantitative Easing won't create inflation because banks don't lend out reserves. The only constraint on bank lending is regulatory capital constraints and willing, credit worthy borrowers (who are currently lacking in supply). Reserves are only good for two things, lending to other banks or buying government treasuries. All QE has done is crush interest income and lower private sector incomes, which is actually deflationary.

NateJanuary 7th, 2013 at 4:27 pm

What happens if we lose our reserve currency status? Do you really think you can endlessly print money and the rest of the world will accept it for whatever value we give it? All the promoters of endless government spending that I have encountered have one thing in common: a lack of historical perspective… just because we have had the reserve currency status for many years doesn't mean we will always have it, talk to England. If you think we can continue our reckless fiscal ways and that nothing would change if we lost the reserve currency status, I think you may be living in denial of economic history. Roubini stated this brilliantly in his book in stating that he isn't 100% Keynesian but that he agrees with some of the theories and disagrees with others. One of the major disagreements is that you can run endless deficits forever and you will never have to pay the debt back. It is short-sited and arrogant of Americans to think that the rest of the world has to tighten their fiscal belts and shore up their budgets while the Americans spend like the wind and pass the inflation on to everyone else since everyone has to buy oil in our dollars.

David WishartJanuary 7th, 2013 at 5:21 pm

If the U.S. loses its reserve currency status, and say it is replaced by the Chinese Renminbi, presumably it would lead over time to other countries wanting to save in Renminbi, rather than USD. So USD falls, Renminbi rises, China runs a trade deficit, US trade balance narrows and maybe even moves to surplus. In this scenario, the US government deficit would shrink, and as a result appear less reckless. Sure, losing the reserve currency status would cause the USD to lose value but I don't think this would be an apocalyptic event. It may even be beneficial for the average US laborer. It didn't crush England after all.

David WishartJanuary 7th, 2013 at 5:22 pm

How do you answer the mystery of Japan? Their debt to GDP ratio has ballooned since 1990, especially in the last 5 years. And yet over the last 5 years their currency has appreciated in value significantly. Their deficit and debt are large because they don't collect much tax revenue. That means the private sector accumulates all of those new Yen being created by the government deficits and ultimately use them to buy more government bonds. These bonds are a financial asset for the private sector, which adds to their stock of financial wealth.

If the amount of dollars doesn't increase over time, but the population does, you have more and more people chasing fewer dollars, which causes deflation and reductions in nominal incomes. Businesses only operate with one motive, profit, which is measured by accumulating more dollars than you spend. If the number of dollars isn't expanding, neither will the number of businesses. I know this idea is abhorrent to many people, but it's just simply the way modern economies work. Notice how much faster the world and technology grew after fractional reserve banking was introduced.

John YardJanuary 29th, 2013 at 6:37 pm

The yen hasd been rising at least partially due to QE. Compared to the dollar,
the yes is seen as 'hard money'. The first competative devaliation was the British pound, next the US dollar , now the yes. Depression/recession is diverted to whomever does not devalue, the euro being the current example.

Blue RepublicJanuary 16th, 2013 at 3:14 pm

Well put, Nate.

To the extent they even think about it, Americans have come
to believe that basic economic principles don't apply to them.

In fact, they only *appear* not to apply and have been sidestepped
due the dollar's world reserve currency status. China has been
working for years to knock the dollar off its perch, and with their
massive gold purchases and establishment of mechanisms for
non-dollar trade in oil and other commodities they have gone
a long way toward creating an alternative.

If China made their currency convertible and backed it even partially
with gold and/or other commodities how good would the dollar be
looking? I'm guessing it would be stampede for the exits time by those
holding dollars – you'd probably have to scrape up Paul Krugman off the
floor with a spatula or something…

Blue RepublicJanuary 16th, 2013 at 2:50 pm

"The U.S. isn't part of a monetary union, so it won't turn in to Greece…"

OK -something more like Zimbabwe with nukes?

grant croxleyJanuary 13th, 2013 at 6:41 pm

America needs a large broad increase in the number of wealthy informed educated people that believe in their country and are willing to back it with their money and future.

sierra7January 4th, 2013 at 5:32 pm

Thank you Mr. Roubini for an excellent view of the current economic mess and what the "short" term future holds for us.
We with will make choices with some moral clarity, or an ideological sword with the most economically challenged Americans impaled on the tip of that sword.
Long term, deep pocketed bond holders historically retreat and await these kinds of economic periods……….Why would they want to upset the status quo ante with the dollar seemingly still the world's basic currency and the FED keeping their backs?
But, when the music stops playing (terminated long term unemployment insurance for one) watch our!!!!

lisaJanuary 4th, 2013 at 7:14 pm


Yes the FCdeal is a letdown by US leadership, but it is really more than a letdown. It’s a real ripoff!
To quote from the Roubini article: " A deal that extends unsustainable tax cuts for 98 per cent of Americans is therefore a pyrrhic victory for Mr Obama." Contrary to especially that quoted Roubini sentence and the emphasis of his entire story, and I do mean story, is the fact that even Roubini is ignoring the real issue about the FCdeal. The real issue about the FCdeal, and the PYRRHIC victory is in fact a totally other issue.

How does the FCdeal extend tax cuts to 98% of US citizens? What does the FCdeal really do to 98% of US citizens? You can really discover what the FCdeal does to 98% of US citizens by researching, and understanding what the FCdeal does NOT do to significantly affect corporate offshoring of US capital gains. and leading national corporate reasonable sharing of tax burden. ( Shame, shame on you Mr. Roubini!!! ) I am writing about the significant offshoring of the REAL CORPORATE CASH PROFTS to avoid REAL and comparatively minimal corporate TAX BURDEN that has not been addressed by the FCdeal. These significant profits by corporations are only possible because of the 98% of workers earning less than $200,000 annually. Probably, the off-shored significant profits have occurred, ESPECIALLY because most US workers through 2012 earn less than $50,000 and $40,000 annually.

Your story implies that the FCdeal causes a 1.2 per cent of GDP drag on the economy. Perhaps I am inferring incorrectly. Isn’t the real drag on the economy the fact that off-shoring of corporate profits has allowed the national leading corporations to decrease their effective share of US tax burden from 35% to 8% approximately? This effectively has caused US citizens to be dumped on, and obligated to pickup the tax share burden that corporations now in fact never pay neither to the states nor to the nation anymore at all. In the meantime corporate leadership is having a field day with all the windfall profits that is only going into a few pockets in the form of exorbitant salaries, and extensive personal expense entitlements. What has increased off-shoring of corporate profits really done to the US economy, US workers, and the US GDP? Who is getting away with what? Who allows what? Who supports what? What is the annual percent of effective drag on the GDP because leading corporations effectively pay no taxes and effectively hide significant profits off shore with no IRS obligations, and with Congressional approval? I bet the real GDP drag on the US economy is more than 1.2%, primarily because leading corporations have been, are and probably still will get away with hiding corporate profits. Leading corporations effectively get away with paying increasingly less taxes because Congress continues to look the other way while the biggest capital flight episode occurs. What does capital flight effectively do to other citizens in a society who cannot off-shore their capital/ savings?
Mr. Roubini you need to redeem yourself by addressing the fact that the FCdeal never addresses anything about the real fact of the drastic consequences by off-shoring of corporate profits to avoid reasonable and appropriate tax burden by leading US corporations over a 30 year period. The Republican, and Democratic National leadership on all levels has been enhancing, approving and continues to allow this corporate trend, which has been accommodated in this latest FCdeal. Mr. Roubini, you are just another member of the failed leadership entourage! Get your story line straight.

kiersJanuary 8th, 2013 at 10:08 am

Yes you bring up a neglected point (really an 800lb gorilla).
All the time that the lamestream media keeps harping on how the US "imports" too much, it MISSES the OFFSHORE PROFITS of US Corps! Only they don't COUNT as "exports" b/c they are parked in havens by their stepchild MNC subsidiaries. THE US EXPORTS A LOT.

Travel the world, america's footprint is UNIVERSAL: movies, starbucks, citibank, coca cola, MS Windows, Google, you name it….it fills the world; it is OMNI-PRESENT…including american pop music played on radio. And yet we keep hearing how much of a favor we do china by buying all their stuff…sorry, that's US Corporations who buy china but sell at US prices. Globalism 101.

Point #2) If corporations "are people too", then how come all that offshore earnings by MNCs are Tax free till repatriation? US Citizens must pay tax on ALL GLOBALLY EARNED INCOME. Ask an expat (or Tim Geithner) if u run into one! How come corporations count as people when it benefits them to sue for their IP, to lobby government, and yet they DON'T count as people when they have to pay tax? Hmm?

All rubbish in the media. Repeat it often enough and it becomes true.

lisaJanuary 4th, 2013 at 7:16 pm


To quote from page 4 of the US Senate September 20, 2012 exhibits to Hearing on Offshore Profit Shifting and the US Tax Code, which BI posted on their site a day ago:
“As the U.S. federal debt has continued to grow and now surpasses $16 trillion, the U.S.
corporate tax base has continued to decline. According to a report prepared for Congress:
“At its post-WWI peak in 1952, the corporate tax generated 32.1% of all federal tax
revenue. In that same year the individual tax accounted for 42.2% of federal revenue,
and the payroll tax accounted for 9.7% of revenue. Today, the corporate tax accounts for
8.9% of federal tax revenue, whereas the individual and payroll taxes generate 41.5% and
40.0%, respectively, of federal revenue.”4
This decline in corporate tax revenue is due in part to the shifting of mobile income offshore. “
From page 5: Current estimates indicate U.S. MNCs have more than $1.7 trillion in undistributed foreign earnings and keep at least 60% of their cash overseas.”
On page 6 of the report, there is a chart of the MNCs “with foreign cash balances greater than $5billion and exhibits the magnitude of profits moved offshore by some of the largest, most successful U.S. corporations. Nearly all of the MNCs listed in the chart keep most of their cash in foreign jurisdictions. Some, including Pfizer and Hewlett-Packard, keep close to 100% of their cash offshore.”
Shifting of mobile income to tax havens- Bermuda , Cayman Island etc…. allows significant changes in proft margins which then affect funds assigned as US income and any US taxes that Corporations then pay. From page 7: “The foreign share of the worldwide income of U.S. multinational corporations (MNCs)has risen sharply in recent years. Data from a panel of 754 large MNCs indicate that the MNC foreign income share increased by 14 percentage points from 1996 to 2004. The differential between a company’s U.S. and foreign effective tax rates exerts a significant effect on the share of its income abroad, largely through changes in foreign and domestic profit margins rather than a shift in sales. U.S.-foreign tax differentials are estimated to have raised the foreign share of MNC worldwide income by about 12 percentage points by 2004. Lower foreign effective tax rates had no significant effect on a company’s domestic sales or on the growth of its worldwide pre-tax profits. Lower taxes on foreign income do not seem to promote ‘competitiveness.’”8

Thank you to BI for posting that US Senate report link of 80 some pages, even though the Permanent Subcommittee on Investigations had redacted some crucial details of information! Will the public ever get access to those crucial little Microsoft and HP comparative details? Could Wikileaks publish those details sometime? BTW, what does 14% of MNC income shifting to their own internal international corporate subsidiaries due to the US GDP and US tax revenue share?

Just to give a general scope of the monetary increments of the cost and profit aspects for one little corporate entity’s cost share distributions and any other kinds of shares, here’s a quote from page 20 of the same report: In 2011, over $7.8 billion out of a total research budget of $9.1 billion was spent on research and development in the U.S. Microsoft received $200 million in U.S. tax credits for conducting this research in the United States. Despite the research largely occurring in the United States and generating U.S. tax credits, profit rights to the intellectual property are largely located in foreign tax havens.68

So if MNCs are conveniently able to legally hide profits, with Congressional tolerance if not blessing, then who should or should not be complaining? Who is contributing that portion-of-the-pie that is the significant crucial monetary amounts that may very well be up to 20% more or less of lost US revenue? No wonder the US GDP and everyone else, other than the corporate elite of those 18 or so MNCs, are scrambling, fighting, and kicking through the tubes, well over the edge, and down below the brink!

The FC Deal is just another, like all the other latest deals, that are causing only plundering consequences for 98% of American citizens, on or off the continuum of inappropriate public policy legislation.
The FC deal is another FU deal, thrown at the faces, and shoved down the throats of 98% of US citizens.

Hopefully, my quotes and inferences are within context. I hope a lot of people read that little report, thanks again BI, and Economonitor. I may not always agree with you guys, but I still like you!

Charles ReeseJanuary 5th, 2013 at 4:38 pm

How about tying a tax to the current state of GDP growth. Here is my proposal for a "True Keyensian Variable Value Added Tax".

GDP Growth vs Tax Rates

-3 % -8%
-2 % -6%
-1 % -4%
0 % -2%
>0% <3% 0%
3 % 2 %
4 % 4 %
5 % 6 %
6 % 8 %
>7% 10 %

If scheme starts in a recession then the negative payments are paid by selling Key VVAT bonds, all tax revenue from the VVAT must be any used to pay off existing VVAT bonds.

After any existing Key VVAT bonds have been paid off all tax revenue is “paid” into Key VVAT savings up to 10% of GDP (= two years payout in an average recession) for use in the next recession.

Revenues > 10% GDP and < 30% of GDP are paid into Key Infrastructure savings accounts and may be used in the next recession on public infrastructure projects.

Revenues > 30% can be used to reduce the deficit and/or debt.

This is just an outline the numbers were picked out of the air but I am sure some economists could improve it with better rates.

jack strawJanuary 12th, 2013 at 5:09 am

Romney/Ryan "postponed the medicaid debate"? really? how? the fact is we have a massive healthcare entitlement to fund (the Affordable Care Act) and nowhere is that even discussed here. how is a reader to take this seriously? this is not a "joke"…somebody has a plan…but there is the "slight" question of "how to pay for it." clearly this involves crossing the aisle…not "smashing the vase." blame "tea party extremists"? really?