Economic Humpty Dumpty

Just because the US Congress has finally agreed on a bill to avert the so-called “fiscal cliff” doesn't mean the economy is out of danger or that industries like the electronics and high-tech markets aren't still in jeopardy from the underlying problems that created the months-long nightmare. In other words, Congress jumped over the “fiscal cliff” but didn't plug the chasm. They'll be coming back this way soon, and the cliff will still be there, deeper and more threatening.

OK, now that I've got that out of the way, let's move on to what's really important to this industry. It's possible that the bill approved by the House of Representatives would have already been signed into law by the time this blog goes live. The president is eager to sign it and lawmakers — both those who supported it and those who voted against it — want it out of sight so they can pretend the nagging issues they skirted in drafting it have all gone away.

They haven't. The unemployment rate is still high in the United States and some economists actually think it may even inch higher in the first quarter due to the damages done by the protracted negotiations. Some small businesses and midsized companies actually froze hiring plans in the fourth quarter of 2012 while waiting for Congress to act. Businesses don't like uncertainties and US lawmakers have become quite infamous for never doing whatever they are supposed to do until the last minute.

That trend towards brinksmanship is still a strain on the economy and will continue to negatively influence hiring, capital equipment, and other operational decisions at companies in the US and worldwide. The details of the current agreement are not important enough to dwell on here, but the fact Congress passed on other major elements of the fiscal cliff will mean continued uncertainties in several economic segments of significance to the electronics industry.

The defense industry will feel the pinch. For one, Congress has pushed out “for two months automatic cuts to the Pentagon and other agencies that had been set to take effect Wednesday,” according to the Washington Post report cited above. Imagine if your company supplies components to key US Department of Defense weapons or aircraft programs but the Pentagon isn't sure if it would have to eliminate the project. The procurement orders for such programs are probably on hold right now and will be for some time. In fact, the Pentagon will continue to review all of its ongoing or planned projects knowing some of them won't make it off the drawing board and others may have to be killed. Suppliers aren't and shouldn't be devoting millions of R&D dollars to projects that may be scrapped.

The biggest hobbling effect from the fiscal cliff, however, comes from Congress's inability to tackle the high Federal debt and weak employment situation in the country. For quite a while, investors and manufacturers have been concerned about US deficit spending and growing national debt. Nothing in the bill averting the January 1 fiscal cliff addressed these two problems. Neither the Senate nor the House of Representatives even focused on any action to stimulate hiring. They simply ignored President Barack Obama's request for $50 billion in additional economic stimulus.

They also didn't do anything about a looming borrowing limit facing the US government. The country could default on its interest payments within the next two months if Congress does not agree to raise the debt ceiling. That tussle over whether or not to raise the debt ceiling and the terms of an agreement between the President and the Democratic Party on one hand and the Republican-controlled House and its Tea Party allies on the other hand will begin over the next few weeks.

How do you think it will be resolved, and will action be swiftly taken? I can answer the second half of that question. No. Congress will, as usual, wait until the last minute to make a decision. More worrying, though, is the idea of allowing the country to default on its loan payments for the first time. Many in the Tea Party movement are ready to push the country to that edge. Imagine what this would do to the global economy and consumer confidence.

It doesn't matter what business you are in — this is one cliff the country can't afford to go over, but it's also the cliff some would like us to plunge into notwithstanding the cost. I call it the Economic Humpty Dumpty. Go over it and you won't be able to put the economy back together again since we would have eradicated a record: The US would for the first time be defaulting on its loan interest payments.

How do you put that crumpled record back together again and rekindle global confidence in the world's biggest economy?

9 comments on “Economic Humpty Dumpty

  1. Barbara Jorgensen
    January 2, 2013

    Yesterday's measure is merely a band-aid for a very big wound. It buys Congress some time, but I think the partisan bickering will continue. I'm not convinced that the various factions have the country's economic interests at heart. It's all about who wins more points: Republicans or Democrats.

  2. bolaji ojo
    January 2, 2013

    Right. But they are also both losing with voters and the general public. At this point, I know I like democracy but I hate the way it is being practiced by Congress.

    January 3, 2013

    Is this fiscall cliff negotiation even related to a proper budget?  From an “outside of the USA” perspective it looks like the politicians have a series of unconnected fiscal discussions that are not tied directly into a well thought out budget.  If that is the case it is little surprise we are in this mess.

  4. Ariella
    January 3, 2013

    @flyingscot we are, indeed, in a mess. What the government is doing is like constantly renewing a loan in bigger amounts every time. Each renewal defers a disaster, but at some point, it will catch up with us all.

  5. Barbara Jorgensen
    January 3, 2013

    FScot: It's great to hear from an outside the US source that sees things clearly. The budget is almost an afterthought in all of this: there is no balanced budget promise attached to the activity. It's all about paying for the status quo without killing the taxpayer and making dastic cuts. It would actually be funny if it wasn't so critical to the econoy.

  6. bolaji ojo
    January 3, 2013

    FlyingScot: Budget? That word didn't come up at all during the jostling over the “fiscal cliff.” This has nothing directly to do with a future budget although it was part of a previous budget negotiation. I believe it's main significance is in determining how much tax different income levels get to pay. That's a simple way to look at it.

  7. bolaji ojo
    January 3, 2013

    Ariella, I believe that at one point the party that is now most concerned about high US debt said “Debts don't matter.” Now, it does. I remember writing then that simple arithmetrics tell me debts matter but that I guess has to do with households than governments. Now, debts have come into focus and they now matter, according to the same party. We've swung, though, too far in the direction we should have been all along and now we want to kill every government program (except defense) because “debts matter.” It's comical!

  8. Ariella
    January 3, 2013

    @Bolaji Back in my undergraduate days, one of my economics professors insisted that the national debt really has no impact on our lives. Since then, the numbers have risen to such a stratospheric point that people can no longer brush off concerns about the debt. 

  9. bolaji ojo
    January 3, 2013

    I imagine that when the government starts cutting back spending on healthcare, infrastructure constructions and repairs, disaster support and unemployment benefits because we have too much debts then we would all (economics professor and layfolks like us) realize debts do count.

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