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US Has Been Let Down by Its Leadership

By Nouriel Roubini, Professor of Economics and International Business

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The longer-term picture is bleaker still. The reality is that America is yet to wake up to the full extent of its fiscal nightmare.

The deal reached in Washington on New Year’s day prevented the US economy from falling off the so-called fiscal cliff. However, given the dysfunctional nature of the American political system, it won’t be long before there is another crisis.

Two months, in fact. If no action is taken by March 1, $110bn of spending cuts will commence. At about the same time, the US will hit its statutory debt limit, known colloquially as the debt ceiling.

That is only the beginning. Later in 2013, and not before time, a bigger debate on medium-term fiscal consolidation will begin. This will lead to another dispute between Republicans, who want to shrink the size of the federal government, and Democrats, who want to maintain it but are unsure how to pay for it.

So expect a big fight about entitlements, and a series of little fights over tax reform: should the US introduce a value added tax? A flat tax? Higher (or lower) income taxes? A carbon tax? Should we close corporate tax loopholes to raise more revenue? It’ll soon get messy.

Read full article as published in The Financial Times