Leading article: A burden of economic responsibility

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The Independent Online

Barack Obama has a lament about his administration's Republican opponents in Congress: "If I said the sky was blue, they'd say no. If I said fish live in the sea, they'd say no". President Obama's complaint is understandable. And he would not be the first occupant of the White House to find himself stymied by the boys and girls on The Hill.

He is right, too. The Republicans are indeed determined to stop Mr Obama offering tax breaks to business and the middle classes. And he is equally sure he will not give way and extend the Bush-era tax cuts for the very rich which are due to expire at the end of this year (which the Republicans continue to champion despite the decisive rejection of Mr Bush's brand of free-market liberalism at the polls in 2008).

So who will win this struggle? Oddly, in Keynesian terms, the arguments are balanced. That is because the $200bn (£129bn) in credits that the White House wants to grant businesses are "fully paid for", and may thus offer no net new stimulus to the US economy. They would help the US rebuild and raise its growth rate in the longer term, as new plant and machinery boosts productivity. But they would provide no immediate boost to demand. By contrast, the Republicans' extension of tax cuts for the rich are not similarly funded and could, in theory, provide a stimulus. Then again, the rich tend to save their tax cuts rather than spend them, so the boost to demand would be much more mooted than if, say, $100 bills were dished out to the recipients of food stamps.

The problem with both proposals is that they risk coming too late to do much good. Few businesses are willing to invest and few individuals willing to spend any tax rebates without that magic ingredient of confidence. Of course a large cheque from the government can always improve sentiment, but, once it has evaporated, business and consumer confidence is extremely difficult to create afresh.

The uncertainty created by the midterm elections is not helping, and deadlock between the White House and Congress after November would probably destroy any residual faith in the future that may still lie in the heart of even the sunniest American.

The good news is that the signals from America are, at worst, mixed. The bad news is obviously that it is increasingly plausible that the US could fall into the kind of deflationary cycle seen in the 1930s or in 1990s Japan. She would drag the world down with her. All of which leaves an awesome burden of responsibility with the Federal Reserve. Ben Bernanke, the chairman of the board of governors of the Fed, has already made some modest moves in the direction of further "quantitative easing", or QE. At the recent summit of the world's central bankers at Jackson Hole, Wyoming, Mr Bernanke made it clear that he stood ready to launch "QE2".

But he was also plain that the Fed cannot carry the US economy on its own: "A return to strong and stable economic growth will require appropriate and effective responses from economic policy-makers across a wide spectrum. Central bankers alone cannot solve the world's economic problems". Not quite an abdication of responsibility, but a plea for the politicians to get their act together.

Things may yet come right. It is possible that the Republicans will put aside their total opposition to anything proposed by the White House or the Democrats, though on current form that is unlikely. President Obama may be so chastened by the election results that he will offer some hefty concessions to his opponents. Public opinion and pressure from the Fed and the rest of the G20 might sober up the US political classes. A fresh financial crisis would also focus minds. But do not bet the economy on it.