In the near-term, Washington must manage austerity with pro-growth policies, even amid secular stagnation. In turn, Beijing seeks to manage local debt challenges with subdued but solid growth.
In both the United States and China, policy outcomes have far-reaching, global implications.
Dan Steinbock
The U.S. budget deal: avoiding downside risks in 2014
After weeks of private talks, House and Senate negotiators, led by Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI), struck a budget agreement. The latter would replace $63 billion of the sequestration cuts slated for 2014-15 with alternative savings measures.
The bipartisan objective was to surpass the 2011 budget-cutting law, particularly the automatic spending cuts (the so-called ‘sequester’), to avoid still another government shutdown and to ensure some stability to fiscal policy-making over the next two years.
In contrast to the once-hoped for “grand bargain,” the new plan is modest. While it was designed not to redesign the tax code and not to touch federal entitlement programs, it seeks to ensure more spending for domestic and defense programs in the short-term. The costs will be offset by embracing deficit-reduction measures over a decade.
But although the budget deal was promoted as a rare bipartisan breakthrough, it was neither rare nor a breakthrough. To defer the next debt crisis, Washington is resorting to still another timeout.
While 203,000 jobs were created in November, a robust recovery would require 200,000-300,000 new jobs per month. Further, unemployment rate remains 7 percent, while alternative unemployment, which includes both the unemployed and the under-employed, is still 13.2 percent.
Despite 45 months of private-sector job growth and half a decade of quantitative easing (QE), the labor force participation rate – those aged 16 and over who are working or actively looking for work – is 63 percent, the lowest since 1978.
Concurrently, the share of the population with a job has collapsed to 58.6 percent.
Most importantly, the budget deal, in its original form, leaves unaddressed the renewal of expanded unemployment benefits for the long-term unemployed. Indeed, the deal could cause 1.3 million Americans now receiving these benefits to receive none after Christmas, while 5 million jobless workers could be left in the lurch in 2014.
While Washington hopes that economic growth should quicken, annualized growth is likely to remain less than 2 percent in 2013 and at best around or above 2.5 percent in 2014-15.
Further, any premature tapering in the next 3-4 months could accelerate downside risks. Indeed, the Fed may not consider hiking rates until unemployment rate plunges to 6.5 percent, which is not likely to occur until late 2014. Consequently, the Fed may continue its third round of QE until March 2014, while record-low policy-rates could prevail well until the end of 2015.
The bipartisan budget deal is designed to avoid the downside risks – not to realize the upside potential.
The Chinese reforms: ensuring upside potential in 2014
When the budget deal was announced in Washington, the annual Central Economic Work Conference began in Beijing, only a month after the Chinese leadership officially launched the reform plans during the Party’s Third Plenum.
During the Chinese leadership transition, most analysts in the West argued that reformers had lost in Beijing. In reality, China opted for tough leaders who could implement broad reforms. In particular, President Xi Jinping and Premier Li Keqiang are decisive economic reformers. If the Third Plenum outlined the official broad contours of China’s economic policies for 5-10 years ahead, the Work Conference shall determine the objectives in the near-term.
At the Plenum, the reform proposals focused on tripartite reforms comprising the market, government and corporations. The eight core sectors include finance, taxation, state assets, social welfare, land, foreign investment, innovation and good governance. Further, the reform blueprint seeks to relax control over market access, establish a basic social security package and allow sales of collectively-owned rural land. With new urbanization, the old household registration system (hukou), which continues to discourage migration, will be gradually phased out.
The reform plans are moving in parallel with increasing financial deregulation, which, in turn, is supported by the recent launch of Shanghai’s free-trade zone (FTZ). While the FTZ advocates seek to make the renminbi fully convertible in the next few years, Beijing’s reformers hope to make the Chinese currency into a major international currency and a reserve currency, in the next few years.
The Work Conference, too, reflects the ongoing shift away from extensive growth, which relied on investments and net exports for three long decades, toward intensive growth, which will be built on consumption, innovation and sustainability in the medium-term. However, even the new reforms are predicated on adequate economic growth, which is deemed to require 7.5 percent growth in the next two years.
Nonetheless, Premier Li Keqiang’s 7 percent bottom-line target in 2014 is likely to require stronger than anticipated credit and investment growth.
Elusive calm through 2014-15
Thanks to the House and Senate negotiators, the budget deal has the potential to ensure stability until the mid-decade in the United States. In order to deliver their compromise, however, mainstream constituencies in each party must keep their vocal and extremist minorities in line. This will not be easy because the mid-term elections are no longer and the end of the Obama era is looming.
Instead of a sustained solution, the bipartisan negotiators have set aside the critical debt-reduction objectives, even though U.S. debt amounts to $17.3 trillion and U.S. total debt already exceeds $60.2 trillion. Total interest for 2013 alone amounts to $2.6 trillion, which is more than all three largest budget items combined – that is, Medicare/Medicaid, social security, plus defense expenditures.
China, too, remains haunted by difficult challenges. In particular, Beijing must manage its growth transition, even as it seeks to contain local debt that soared as collateral damage from the 2009 stimulus package. While probabilities for hard landing are fading for 2014-15, deleveraging challenges loom thereafter. Further, if local government deleveraging, along with legacy debts, begins already in late 2014, the potential for downside risks could increase after mid-decade.
What Washington has not achieved is an accord on a sustainable, long-term blueprint for tax and spending policies over the next decade. That would require credible, bipartisan cooperation over a medium-term debt/deficit plan.
What China has not achieved yet is a detailed blueprint for local debt management over the next few years. That requires decisive consensus in Beijing, which does exist, but also tough implementation at local level and across Chinese provinces, which is more challenging to achieve.
The last thing the ailing Europe and Japan, and the slowing large emerging economies need is still another U.S. debt debacle, or a protracted slowdown in China.
However, if the looming post-2014-15 challenges can be overcome, global prospects could be blessed by another period of slower, though more sustainable growth and increasing prosperity.
Dr. Dan Steinbock is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). See also www.differencegroup.net
