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Diane Swonk

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Drought in Political Leadership Undermines Growth

Posted: 07/17/2012 1:10 pm

Drought-like Conditions

Over the last two months, I have spoken with more than 200 economists, CEOs and policy makers from almost every industry and every corner of the world. The last of those meetings occurred over the week of the Fourth of July, as some 30 economists who are experts on regions of the world, descended upon Chicago. The mercury crossed 100 degrees, and the Midwest literally slipped into a drought as we met: a sad metaphor for the drought in political leadership, which all of us agreed has put much of the developing world where it is today.

European leaders seem to have a slight edge over their U.S. counterparts, as financial markets have forced their hands to come up with at least some kind of an idea on how they might save the euro. This includes unifying Europe's moribund banking system, creating a system of deposit insurance to stop bank runs, breaking the link between the banking problems and the sovereign debt crisis and finding a more credible way to centralize fiscal policy. The goal is that a Europe tied together with some kind of a common treasury will ultimately emerge more efficient and better managed; that tie would precipitate structural reforms that many counties are unable (unwilling) to implement without the pressure of economic convergence.

That said, European leaders have hardly succeeded. Much of what they have accomplished amounts to stopgap measures, which avert the crisis of the day, but fail to institutionalize the changes necessary to actually stop the euro and the euro zone from imploding.

U.S. political leaders are even worse, delaying decisions on legislation that could easily push the U.S. economy back into a recession if left unaddressed. The risks associated with the "fiscal cliff," including the expiration of a broad swath of tax cuts and mandated spending cuts, are particularly high. The Congressional Budget Office (CBO) estimates that the bill associated with the "fiscal cliff "could cost the American economy as much as 4% of real GDP growth and thrust the U.S. back into recession at the start of 2013. This is to say nothing of the costs to overall growth that such delays in dealing with the cliff have caused the economy today. It is hard to make a commitment to hiring, in particular, when you know you may have to start firing again, as soon as January.

Then, of course, there are the geopolitical risks associated with the "Arab Spring" and the political instability it has caused in the Middle East. One observer put the risks of a conflict with Iran at 50%, which combined with a leadership crisis in Saudi Arabia, could force the price of oil back above $100 per barrel. That is too much for anyone to absorb without offsetting fiscal stimulus, which is not very likely in the developed world.

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