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Happy landing? Possible, but unlikely

January 31, 2013 - Rob Weaver
The Senate passed a short-term increase in the federal debt limit Thursday, sending the bill to President Barack Obama, who is expected to sign it into law.

The crisis of defaulting on government debt appears to have been postponed.

"Failure to pass this bill will set off an unpredictable financial panic that would plunge not only the United States, but much of the world, back into recession," Sen. Max Baucus, D-Mont told The Associated Press. "Every single American would feel the economic impact."

Without the bill, the Treasury Department said, the government would default on its obligations within a few weeks. Of course, with it, possible default is put off until perhaps August.

That is important because if Baucus is correct, recession could have resulted. But note we are at least half way there now. The Commerce Department reported Wednesday the U.S. economy shrank by 0.1 percent in the last quarter of 2012. The dip was blamed in part over worries about the debt-limit deal and the extent of any tax hikes.

A recession is defined as two straight declines in the gross national product. How the economy performs during the first quarter of 2013 will be impacted, in part, by how consumers feel about having slightly less take-home pay due to the end of a break on payroll taxes. So you can see why members of Congress and the president would want to put off serious talk about the budget deficit and national debt -- not to mention delay the spending sequester -- until after March.

In a column filed Wednesday, consultant and economist Lawrence Kudlow made an interesting observation: “Even with the fourth-quarter contraction, the latest GDP report shows that falling government spending can coexist with rising private economic activity. This is an important point in terms of the upcoming spending sequester. ... by keeping resources in private hands, rather than transferring them to the inefficient government sector, the spending sequester is actually PRO-GROWTH.

Reading this, I recalled the earlier part of 2001, when there was talk of guiding the economy to a so-called “soft landing” -- dialing back economic growth to around 2 percent to avoid recession and inflation while maintaining the record-long expansion. And that seemed possible -- until Sept. 11.

But maybe federal budget can be guided to a soft landing -- one in which the rise in spending is less than the rise in revenue (and, optimally, kept close to the rate of inflation) -- without slowing our already anemic (but perhaps more sustainable) economic growth.

I believe that can be done. I'm not at all certain it will be done.

Online: Kudlow's column:


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