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11:29 am
Wed September 11, 2013

Maybe 'Muddling Through' Isn't That Bad For The Economy

Originally published on Wed September 11, 2013 4:15 pm

When the global financial system started to collapse five years ago, leaders from the Treasury Department, Congress and the Federal Reserve jumped up and started running.

Like men on a burning wooden bridge, they raced along, making crazy-fast decisions. They seized Fannie Mae and Freddie Mac, bailed out big banks, saved automakers, slashed interest rates and funded a massive infrastructure-building project to stimulate growth.

But that was then.

Now, whenever a gridlocked Washington faces a money-related crisis, solutions involve small sideways moves, such as nudging up the debt ceiling or standing aside while the autopilot "sequestration" process imposes sweeping spending cuts.

Next week, House Republican leaders may push for a vote on yet another stopgap spending bill to keep the government operating beyond the Sept. 30 end of the fiscal year. (Previously, the leaders had planned a vote for this week.) Congress hasn't passed a regular budget since 2009.

In Europe, the leaders often refer to this sort of minimal, temporary action as "muddling through." In fact, European Union officials are famous for it. When faced with a collapsing Greek economy, EU leaders did just enough to preserve their union. Ditto for crises involving Ireland, Spain, Portugal and Italy.

And in China, leaders have been facing a real estate bubble and other potential crises. But they too have been avoiding radical reforms.

Here's the weird thing: Muddling may be working.

The global economy, while far from robust, is growing. The United States, Europe and China are navigating dangerous waters and — so far, at least — have kept their economies from sinking.

"A relatively quiet Congress is not necessarily a bad thing," says John Makin, an economist with the American Enterprise Institute, a conservative research group.

Congress passed the Dodd-Frank Wall Street Reform legislation in the wake of the financial crisis three years ago. Now many businesses wish Congress had been gridlocked then, Makin says. "The Dodd-Frank legislation was passed very rapidly — and now it's probably a net negative" for the economy, he argues.

He notes too that while Congress has been in its muddling-through period, the annual deficit has been shrinking dramatically.

Just this week, the Congressional Budget Office said that for the first 11 months of this fiscal year, the federal government ran a budget deficit of roughly $750 billion — a reduction of more than $400 billion from the deficit during the same period last year.

"We've made a lot of progress" simply because Congress never could agree on how to stop automatic cuts under the sequestration process, Makin says.

In fact, the whole economy has continued to improve. Auto sales are strong, and new homes sales are at a five-year high.

Meanwhile, even Europe is growing again, and China is picking up steam. IHS Global Insight, a forecasting firm, predicts global growth will come in at a fairly healthy 3.4 percent next year.

So is "muddling through" really a brilliant strategy?

IHS Chief Economist Nariman Behravesh says it would be a mistake to think that indefinite inaction is the path to good economic health. All over the world, leaders have "done what they have to do to avert meltdowns, but they haven't dealt with underlying problems," he says.

For example, Congress has not taken action to solve long-term problems involving crumbling infrastructure, immigration and education, he says. And in Europe, "they still have huge issues with their labor laws, lack of competition and lack of a fiscal union," he adds.

In China, "they'll probably get through this soft patch, but they have big long-term problems, like an aging population and huge income disparities," Behravesh says.

David Shulman, a senior economist at UCLA Anderson Forecast, says that although the U.S. economy has been growing so slowly for so long that the situation is starting to look "normal," it really isn't. "The economy is hugely underperforming," he says. The labor market is still short by at least 10 million jobs, he says.

"We aren't back yet" from the financial crisis, and having leaders in Washington doing so little has not been a plus, he says.

Even Makin agrees, saying that while doing nothing may be better than taking ill-advised steps in the short term, "there are still so many things we need to fix for 10 years out."

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