Debt the monster the President must control

The politics for President Barack Obama look dreadful, with the predictions for the mid-term elections somewhere between dire and catastrophic.

But the economy? Well, the economy is the principal reason for the President's unpopularity and the recovery from recession has certainly been muted and uneven.

But to this visiting outsider, the fact that the mess was entirely inherited from his predecessor is not appreciated as much as it should be, and there are reasons to be slightly more optimistic - provided one huge matter is dealt with effectively.

The US economy is growing. Figures out last week showed third-quarter growth running at an annual rate of 2 per cent, quite a bit slower than the long-term trend. Consumption was not too bad, up 2.6 per cent.

Exports did well enough, but imports shot up, which will reinforce the calls in the new Congress for some sort of import controls.

There is the further problem that the impetus for growth this year has come to some extent from the stimulus from the Federal Government, and this runs out next year.

One initiative, tax rebates on home purchases, ran out in April, and already the housing market may be heading down - figures vary from place to place, but for the past two months the tiny housing recovery seems to have been stalled.

A further boost from the Federal Reserve is widely expected, with an announcement of another bout of easing this week, so the monetary accelerator pedal will stay pressed to the floor. How effective that will be is unclear.

The main differences between this recovery and previous economic cycles are that growth has been towards the bottom end of the scale and growth in employment has been the slowest of any since World War II.

Unlike companies in Britain and much of Europe, particularly Germany, American firms cut labour sharply as demand fell off and did not rehire as it returned.

So productivity numbers are great but unemployment numbers terrible.

The good news is that as demand picks up, firms must rehire; the bad news is that demand may not pick up much.

So, a slow recovery and a jobless one, a stalled housing market. What rational reasons are there for even cautious optimism?

The main one is that the natural condition of the US economy is growth. It has population growth, and space to accommodate it.

There is also an ability to adapt, to create new business models and new applications for the technology the country develops.

Think two years down the line, when Obama comes up for re-election. By then, there will have been three years of growth.

The housing market will have had two years of price stability, maybe even some gains. The Federal Government will be showing a profit on its investments in the motor industry rescues and maybe on its banking bailouts. Given the inheritance, it won't be a bad record.

So what is the huge matter that has to be resolved?

Only three years ago, the stock of public debt in Canada, relative to GDP, was higher than that in the US. But Canada ran surpluses during the boom and now looks like returning to fiscal balance within five years.

The US not only added to its debts during the boom years but is likely to keep adding to its debt mountain until 2015.

Even more alarming, by then the running deficit will be rising again.

Obama needs to carry through the plan that he is talking about, which is to bring the deficit back under control.

That cannot be done in the next two years but has to be done in the next six.

- INDEPENDENT