Hazar Raporu - Issue 02 - Winter 2012

problem in August 2011, the Congress
passed a statute called Budgetary Control
Act of 2011. This law temporarily solved
the debt ceiling crisis but a permanent
solution was left to Congressional Joint
Select Committee on Deficit Reduction
which is also called Super Committee. The
committee was supposed to decide on a
plan that entails a $1.2 trillion spending
cut for the next ten years but unfortunately
the committee was not able to reach to
a decision. Another item in the law was
saying that if no agreement is reached
in this committee automatic spending
cuts will take place beginning in 2013.
Therefore, if the Congress does not make
any change before January 1, 2013 there
will be automatic spending cuts in many
areas. In an economic environment where
economic recovery is still very slow, these
automatic spending cuts and tax increases
raises the possibility of a recession in US
economy in 2013. Obama will now have
a hard time in persuading Republicans in
reaching an agreement with Democrats
on this issue. As mentioned before, there
is a significant disagreement between
Republicans and Democrats about how
the budget deficit will be reduced and
Obama will have a big challenge in finding
a way that will make both sides happy and
not putting the economy into a slowdown
again. Most probably, a permanent
structural solution will not be found again
to the fiscal problem of US, but still there
will be an agreement that will avoid the
devastating effects of Fiscal Cliff on the
economy.
Obama’s another challenge is about how to
speed up the economic recovery process
and increase employment. Economic
policies that are adopted up to now have
been successful in taking the economy out
of recession but the economic growth rate
is still below its potential. Unemployment
rate has dropped from double-digit
levels to 7.9% but it is still well above its
long-term average which is 5%. Under
the current situation, monetary policy
has very little to do in order to support
the economic growth. Over the last four
years FED increased the money supply
by more than $2 trillion and reduced the
interest rates to almost zero. However, as
the households are very much indebted
the effect of monetary policy is quite
limited. Obama believes that at this point
fiscal policy will be a more useful tool.
He thinks that infrastructure investments
and increased social security spending
may generate new jobs for the economy.
In addition to that, Obama is planning to
create 5 million new jobs by clean energy
programs. Investments in renewable
energy sources such as solar and wind
power will reduce the dependency in
imported energy and also create new jobs
for the economy by the establishment of
new sectors.
Obama has been re-elected but difficult
days are ahead in terms of economic
situation. If he can persuade Republicans
in terms of finding a permanent solution
to US fiscal problem this will help the
US economy in achieving a long-term
sustainable economic growth. In fact, if US
economy reaches to his potential growth
rate and fiscal balances are restored this
will have a positive impact on the world
economy as a whole.
CASPIAN REPORT
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