The Big Issues For 2013

Tyler Cowen has presented 14 big stories to watch for 2013 and has provided links to similar stories at The Guardian and the Financial Times, http://marginalrevolution.com/marginalrevolution/2012/12/stories-to-watch-for-in-2013.html .  I shall comment on a few of these both that he states and links to, as well as some I have on my own mind.

Given the passage of the minimalist fiscal cliff deal that raises some taxes but makes no major spending cuts, with the GOP supposedly now aiming to try to squeeze those out in a showdown later this year over raising the debt ceiling, I think that the top story for the US and world economy is indeed this forthcoming fight.  Cowen has as his fourth point a genuine concern that the fight will actually result in a failure to raise it on time and a default with potentially devastating consequences.  I agree that this is a real possibility and is indeed a serious danger to all of the above.  Maybe the coalition that passed the fiscal cliff bill will be reasonable on the debt ceiling, but some of those voting for it are lame ducks going out the door.  Obama has said that he will not stand for another replay of the insanity of what went down in August, 2011, but this will indeed require some drastic action.  The one that a lot of us have been urging is if the House goes bonkers  then he should move to shut this down once and for all by declaring the debt ceiling unconstitutional.  If he does not quite have he chutzpah for that, there is also the trillion dollar coin out, although I find that gimmicky.  If one is going to shut down this blackmail game once and for all, then eliminating the debt ceiling once and for all by declaring it unconstitutional is clearly the way to go.  In his speech this evening, Obama clearly has laid the ground by noting that the bills authorized by Congress must be paid.  In the end what may be holding him back on declaring it unconstitutional is that back in 2011 his old constitutional law professor at Harvard, Lawrence Tribe, declared it constitutional, but he needs to think about this very carefully and seriously.  If he screws up on this, and the House gets run by the loonies, things could indeed really go off the rails for the US and the world economies.

 Cowen's seventh point is that China needs to have a decent rebound.  Many may not realize how dicey things have gotten there.  Growth has decelerated to a 7.1% rate as of the third quarter of 2012.  Certainly China will need to adjust to having lower growth rates than it has had in the past, and this rate may be about what it can manage, although clearly many are hoping (and predicting) that it will rise again somewhat soon.  That would certainly aid global economic growth, but there remains a major fly in the ointment, aside from its overreliance on massive construction projects that seem to be increasingly of the diminishing returns variety, and that is its property bubble.  That may not burst, but there have been quite a few observers both in and out of China who have been very worried about this.  I would have to say that based on my own personal contacts, those in China have been more pessimistic about this situation than those outside of China.  I would say that a possible collapse of property values in China leading to a much more serious slowdown of the Chinese economy is probably the second (and possibly first) most serious threat to the global economy after the possibility of a screwup regarding the US debt ceiling.

His second point is concern about the Catalan independence movement in Spain.  This has not gotten much attention in the US, and there are a variety of ways that it could be resolved with little disruption to the world economy.  However, Spain remains the most crucial linchpin in the Eurozone, currently in a bad recession with youth unemployment at 50% and struggling to get its public finances sufficiently in order to keep the support from Germany and the various Eurozone financial institutions coming (and it should be kept in mind that prior to 2008, Spain was actually running a budget surplus, in contrast with Greece and some of the other troubled Eurozone economies).  While Cowen and others worry about Italy, I figure it will muddle through, but the Spanish efforts are completely complicated by the Catalan move to declare independence, both because it is one of the highest income parts of Spain, but also because its own debts are very large and it is likely that the EU may not even let it join, much less offer any assistance to it for dealing with them (arguments over Catalunya's ability control its own taxes is a central feature of its debate with the Spanish central government).  The bottom line is that the Spanish central government may simply be unable to negotiate successfully with both the Catalans and the Germans and other Eurozone powers.  A full bore Spanish default cannot be ruled out, and it is sufficiently large that this is the case that could really push the broader Eurozone situation into becoming the trigger for a broader global crisis.

Having mentioned China's problems, I note that more broadly the BRICS are not doing so well, and this will become a more serious problem in this coming year, although probably the problems of the other constituents of that group will not be bad enough to drag down the global economy.  But their collective problems constitute a dragging element where they had been a leading part of helping the world economy to recover from the Great Recession.  India's accumulating and multiple problems are Cowen's 12th point, and the possibility of a major political crisis in South Africa is his 7th.  Neither he nor his links mention Brazil or Russia, but the former has declerated to barely a 1% growth rate, which is far below what it has been doing in recent years.  Russia may be in the best shape of these, but if oil prices fall, it could also fall into difficulties, and clearly there is a serious political and corruption problem there that does not seem to disappear.

The Guardian provides discussons of both Iran and Israel, noting that both will have elections this year, with Israel's coming up quite soon.  Quite likely Netanyahu will be reelected, most likely with an even more hawkish coalition in his government.  Iran has a presidential election in June, and incumbent Ahmadinejad cannot run for reelection.  He has become quite alienated from the Mullah establishment, which will make it hard for him to get his favored candidate through.  Amazingly enough there is serious talk of relatively moderate former president Khatami running, although he will have to kowtow to the clerical establishment to do so.  This suggests the possibility of perhaps some opening to a settlement with the US over the nuclear issue that would keep the Israelis at bay from attacking.  Of course, the real leader is Vilayat-el-faqih Ali Khamene'i.  While hawks in Israel and the US have been warning for years that Iran will be at the point of being able to "break out" to build nuclear weapons quickly, there are more serious voices at this time saying that indeed this may be the year when that capability may be achieved.  If this is the case (or strongly perceived to be) and there is no agreement, there could be war, which could be catastrophic both economically and in other ways for the world economy and the world more generally.  However, it must be kept in mind that the US intelligence establishment, and even the Israeli one reportedly, agree that Khamene'i has not decided to build nuclear weapons and has issued numerous fatwas against having them at all.  It would be tragic if we go to war just on the possibility that they might have the capability of doing so.

Let me close this on a positive note.  I agree with Dean Baker and others that there is now a solid foundation for the US economy to continue to grow in a fairly solid, if unspectacular, way for the coming year, if it does not get derailed by one of the above potential crises, or something else not listed and possibly unforeseeable at this time.  There are two main sources for this optimism.  The most important one is that the crucial sector that generated the 2008 crisis has really hit bottom and now appears to be growing solidly, namely housing construction.  It will take a bad crisis to derail this recovery, which has been a long time coming, although it could happen (if a debt ceiling crisis resulted in an interest rate spike, that could do it). 

The other is the turnaround in the financial situation of most state and local governments, which unlike the federal government mostly face serious balanced budget rules.  The major source of decline in GDP and particularly of employment during the last two years has been this sector.  This decline now appears to be over.  While nobody is forecasting any noticeable increase coming from this sector (and a major move to austerity at the federal level could renew their decline), just having them not declining should help provide a support for the overall US economy to continue to grow in a reasonably solid way if one or another of the potential catastrophes lurking out there can be avoided.  And they could surprise everybody and actually engage in some expansion of spending and hiring.

So, happy new year one and all!