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      Spending Cuts or Bust - A Congressional Dilemma

      Congress has two months to avert a default and see which party blinks.
      By Amiel Ungar
      First Publish: 6/1/2011, 10:21 PM / Last Update: 6/1/2011, 11:41 PM

       

      Before last year's British general elections, the Conservatives and Labour took turns displaying economists who endorsed their policies . One day the Conservatives would trot out their economists, including Nobel laureates, to argue that government spending had to be reduced and the deficit tamed. The next day Labour would reply with economists, including Nobel laureates, who claimed that cutting government spending before the signs of economic recovery were apparent would court disaster.

      The British parliamentary system, however, made this debate part of the election campaign, but no more than that. Since in Britain the party or coalition forming the government has majority in Parliament, the economic direction is a function of who holds that majority.

      The American system, with a Republican controlled House of Representatives and a Democratic president, is another story and the threat of collision is real.

      Today House Speaker John Boehner presented a statement by 150 economists, including Nobel laureates, who endorsed the Republican position that any increase in the US government debt ceiling had to be accompanied by equivalents spending cuts. One can expect the Democrats to retort with a list of their own to dispute the Republican experts.

      The clashing petitions and studies are part of a battle for public opinion. In the United States Republicans and Democrats are conducting an economic game of chicken, and unless one driver blinks or both seek to reach a compromise, there's going to be an economic crash.

      If the United States does not raise its debt ceiling it will have to default in August. This  means that all recipients of government benefits from cancer research to Social Security will not be receiving these benefits. The repercussions for banking and credit are incalculable.

      The Democratic strategy is to confront the Republicans with such a doomsday scenario in the expectation that they will yield. The Republicans, in addition to believing that it is necessary to balance a higher debt ceiling with spending cuts, are in a position that they cannot allow themselves to flinch. Many of the Republican freshman class in the House were elected on promises of fiscal retrenchment.

      Additionally, the American public is convinced that expanding deficits constitute a threat. Therefore another purpose of the list of economists was to signal the Democrats that they as well have no room for retreat.

      The Obama administration is meeting with Republican legislators on Wednesday and with Democratic legislators on Thursday to see if a compromise can be reached. As the Republicans want the cuts as well as modification of programs such as Medicare, it will not be easy.  A compromise struck by the administration will help Obama in 2012, but Democratic congressmen have already signaled the administration that they as well are players in this game and they will fight vigorously for federal programs.

      The dollar is going south because of unfavorable statistics, but there is also the issue of economic uncertainty over how the deficit crisis will play out.