When the US Sneezes Alberta Gets Pneumonia

Standard and Poor’s decision to send a shot across the bows of US economic policy is very welcome. AS the US continues to spend beyond its means and build up a considerable debt - $14.5 trillion and counting – and the politicians cannot agree on a basic strategy to deal with it, someone has to remind the US that sovereign debt needs repaying and that, in the absence of a sovereign, this requires the US to both cut spending on key services (Medicare, Medicaid, Social Services and Defence), reduce transfer payments to States and raise taxes. The trouble is none of the politicians, who tax their friends so as to keep them in office, has the real courage to actually do anything.

To be sure, various politicians talk a good story. But words are cheap. It the action that counts. The recent kerfuffle between the Grand Old Party and the Obama Democrats over a small cut of $38 billion – less than 1% of spending – tells us that courage is absent, politics is broken and even minor challenges to the status quo scare those who govern the nation that used to be the most important on earth.

President Obama has proposed a program of cuts estimated at $4 trillion while his Republication opponents have proposed cuts of $5.8 trillion over ten years. Both see reducing debt as important, but we all know that neither, especially in a Presidential election year, plan to do anything. Cuts to Medicaid, Medicare, Social Services, Defense and hard caps on spending in all other areas coupled with tax increases don’t “sell” to an electorate already battered by the impact of recession.
Yet these same politicians watch the PIGS – Portugal, Ireland, Greece and Spain – struggle to restore confidence in their economies abroad while fighting real battles at home over the nature of economic stringency. The US must see the protests in Greece and Spain as signals of what might happen in Georgia, Detroit, Nebraska and Arkansas and wonder who will be the political survivors.

This is a major issue for Alberta. Our economy, increasingly dependent on unconventional oil and services, relies on the US for its robustness. Our $247.2 billion GDP relies heavily on exports - $53.9 billion in oil and gas - shipped mainly to the US. What happens if the US has a double dip recession and then starts to have real cuts in public spending of the order of a $500 billion a year for the next decade?

We have a clue. When house building collapsed in the US due to the recession, triggered by the housing bubble, our exports of lumber suffered massively and are only now recovering. While we are increasing exports to other jurisdictions of wood and other natural resources, the US is still our major customer. We know that when the US catches a cold we get pneumonia.

So it is in our interest to keep a close eye on the US debt reduction strategy. We should encourage our Southern Cousins to follow the example of Britain and cut deeply, fast and now. Setting an aggressive debt reduction agenda and then following through by doing it may significantly slow the rate of the US recovery, but this is preferable to a unsustainable recovery based on false accounting, avoidance of key issues and a refusal to act. In the medium to long term, the US would be helped not hindered by stringency.