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December 19, 2012

US Economic Health Key to Global Growth in 2013

by Mil Arcega

On the economic front, 2012 was a mixed year of cautious growth, surprises and setbacks.  It was also a year of politics and global tumult - a time to deal with unresolved issues and ideological positions. 

In the United States, the jobless rate has declined to a 4-year low, the housing market has stabilized, and financial markets are flush with cash.
   
But as 2012 comes to a close, there is unanimous agreement that the recovery has not been as strong as everyone had hoped.

The U.S. is not alone.  In the rush to fix broken economies, conservative economist Richard Rahn says governments around the world continue to spend more than they take in. "If countries had only been spending within their means in keeping spending growing no faster than the rate of economic growth, we wouldn't have the global economic mess," he said.

Others argue the math is not that simple.

Case in point, Greece, where tough austerity measures, pre-conditions for a second bailout - have produced a deep recession that economist Desmond Lachman says threatens the currency union. "Because what we're doing is, we're really applying very stringent austerity measures. The IMF concedes that the austerity hasn't been working, yet the Europeans are persisting in the same kind of austerity that got them into trouble in 2012, so something's got to give," Lachman explained.

But concessions will not be easy, especially in Washington.

Despite weeks of intense negotiations, the White House and Congress have yet to reach a deal on the so-called "Fiscal Cliff".

The term refers to the combined economic shock of deep spending cuts and automatic tax hikes starting January 1.  Without a compromise on ways to reduce the nation's 16 trillion dollar debt, experts say a recession is likely.  The problem is not the U.S. economy but a broken political system - says fiscal reform advocate Robert Bixby.  "Political dysfunction in this country is a bigger threat than economic dysfunction," he said.

Given the inter-connected nature of commerce, a shock to the world's largest economy would have ripple effects.  Bruce Stokes is an economist at the Pew Research Center. "There's an old saying that if we get the sniffles, the rest of the world gets a cold and so if we end up going to a recession as well, I think everybody is going to suffer,"

Despite recent progress in Europe, the IMF trimmed its global forecast in 2013, citing slower growth in emerging markets.  

It does not have to be that way says Federal Reserve Chairman Ben Bernanke, who urged U.S. lawmakers to provide leadership in uncertain times. "Such uncertainties will only be increased by discord and delay," he stated. "In contrast, cooperation and creativity to deliver fiscal clarity, in particular, a plan for resolving the nation's longer term budgetary issues without harming the recovery could help make the New Year a very good one for the American economy."

Both sides are reportedly moving closer to a compromise that could see taxes raised on wealthy Americans.  But as one year ends and a new one begins, the world watches to see whether a politically polarized nation still has the will to tackle problems that have potentially far reaching implications for the rest of the globe.