In reading commentaries on the debate over whether to extend the 2% Social Security payroll tax reduction for 2012, the view of many of its supporters is that the U.S. economy is so fragile that growth will stall if this measure is not passed. However, it seems hard to reconcile concern about the impact of not extending the SS payroll tax cut with the general complacency about the European debt crisis. It seems ludicrous that a consensus seems to be building around the competing ideas that: 1) the U.S. economy is so fragile that an extension on the SS payroll tax reduction is required; and 2) the U.S. economy can muddle through a steep downturn in Europe.
My viewpoint is that the U.S economy is at terrible risk from a collapse of European economies. Southern Europe is already in a depression, and the rest of the continent is soon to follow. The biggest question in my mind is when the collapse of the European economies will start. My expectation is that either a bank or a sovereign debt auction will fail by February, 2012 and this will set off a cascade of additional failures.
The impact on the fragile U.S. economy of a European collapse could be as bad or worse than the Lehman failure in 2008. A European collapse would impact the U.S. economy due to the interconnectedness of the banking system, reduced exports of products and services, and the impact on earning of U.S multinational corporations. During the last U.S. Presidential year, the DJIA average dropped by 3,500 points with most of the drop occurring during a 30 day period from mid August to mid September . A comparable decline in the DJIA could be in the cards for 2012 if Europe collapses.
It seems unlikely that the results of the vote on an extension to the SS payroll tax cut will have even a fraction as large an impact on the U.S. economy as what happens in Europe.
Does Democracy Still Work in the Age of Entitlements?