For the first time in years, American policymakers are a bigger threat to the world economy than European ones. The Organization for Economic Cooperation and Development (OECD) reported Tuesday that the risk of breaching of America’s debt ceiling and a change in U.S. Federal Reserve policy are among the biggest threats to the global outlook for 2014.
The assessment comes from the OECD’s latest global forecast. The report called for the repeal of the debt limit law that sets the stage for the default brinkmanship that has marked budget disputes ever since the Republican Party retook the House of Representatives in 2010. Breaching the debt ceiling and defaulting on U.S. debt would cause credit markets to freeze, disrupting just about every economic transaction, at the same time as it forces a massive, instant pullback in government spending — a double-whammy that would guarantee a second recession, and likely one even more severe than the Great Recession. Instead of placing an artificial limit on borrowing that periodically threatens to destabilize the world’s largest economy, the OECD recommended that Congress adopt “a credible long-term budgetary consolidation plan with solid political support.”
Chief OECD Economist Pier Carlo Padoan also noted that the debt ceiling hurts the world economy by its very existence, even if it is never breached. “The continuous affair of discussing debt every few months is simply detrimental to confidence levels and therefore growth,” Padoan said, referring to the chronic budget crises that have cost the country 900,000 jobs.
The report also warned that a slowdown in the Federal Reserve’s bond buying program known as Quantitative Easing, or QE, would have major negative effects on economies around the world that are closely tied to U.S. bond markets. There is significant evidence that QE was the only thing that saved the country from reverting back into recession this year.
Warnings from international economic experts about the harm caused by American fiscal policy are nothing new. But for the past three years the OECD was focused on the crisis in the Eurozone countries as the primary threat to the world’s economic recovery. The risk of economic collapses or the fracture of the Euro currency union dominated the group’s 2011 and 2012 reports. Those risks still exist, but they’ve been supplanted by American dysfunction.