America’s ‘fiscal cliff’
Moments after it became clear that US President Barack Obama had won a second term, the media began to talk about the “fiscal cliff” facing the government. This is a striking metaphor. CNN’s talking heads assume that everybody knows what it means. But, like many who do not regularly follow the economic news, I’m hearing it for the first time, certain that it is not a standard trope in economics.
Indeed, I have just learned that this figurative expression was coined by Federal Reserve Board chief Ben Bernanke to describe a regime of legislated austerity measures that are to take effect automatically on Jan. 2 unless an amending law is passed. Once they kick in, analysts say, it is likely that America will sink in a recession deeper than what it struggled to overcome in 2009. These drastic measures spread out over 10 years are contained in “The Budget Control Act of 2011,” a federal statute grudgingly passed by the US Congress in July last year after a series of stalemates. Without this law, which permitted new borrowings, the federal government would have literally run out of money.
In exchange for lifting the debt ceiling, Congress mandated huge across-the-board spending cuts and increases in tax revenues, all aimed at reducing the budget deficit by half starting 2013. The objective is not to bring down America’s debts but merely to slow down the rate of their increase. That’s how bad the fiscal picture is.
What this amounts to is that some people must start paying higher taxes, while others must give up social welfare entitlements. The fight between the Democrats and the Republicans essentially boils down to the issue of where to take the cuts and who should pay the additional taxes. Republicans argue that to burden the rich with new and higher taxes would be to undermine their capacity to create more jobs and help in the economic recovery. But that is more or less the same argument of the Democrats who say that drastically slashing benefits meant for the lower income groups would deflate consumer demand and compromise growth.
The function of politics in a nation’s life is never more vigorously dramatized than at particular junctures like this. From this perspective, it will be seen that political exercises have only one purpose: to determine who should make those hard decisions that bind the whole nation. A Romney victory would have been interpreted as a signal authorizing America’s wealthy to take the lead in reinvigorating the flagging US economy. It would have led to a slashing of all welfare spending while suspending the implementation of higher taxes aimed at the rich.
Everyone had hoped that the 2012 elections would settle once and for all the question of who had the mandate to steer the country away from the fast approaching abyss. As it turned out, the elections, which cost the American people a whopping $6 billion, did little to clarify the issue. A sharply polarized nation retained Obama in the White House, but left untouched the Republican control of the House of Representatives, and the slim Democratic majority in the Senate. Needless to say, this is the same configuration of forces that produced the dysfunctional gridlock that nearly brought the federal government to a standstill in August 2011.
President Obama today finds himself in almost exactly the same situation vis-à-vis Congress as in 2008, but minus the popular euphoria from which he drew the moral fiat to lead a hopeful nation. Having won four more years, he must now try harder to find common ground with a Republican Party that did everything to deny him a second term. He has to convince the richest 1 percent, who despised him and spent hundreds of millions of dollars to defeat him, that he does not intend to destroy them, and that their fate is indivisible from that of the rest of the nation. He must plead for greater patience from ordinary Americans who, in the midst of the highest unemployment rate ever recorded for the United States, kept their faith in his sincerity and capability. One cannot listen to Obama without getting the sense that he is a man driven by an unflinching will to accomplish something heroic for his country.
The looming “fiscal cliff” will test Obama’s resolve far more than any other crisis that has faced America. If he fails to get Congress to set aside partisan interests and pass a new measure before the year ends, many government programs will grind to a halt. Many children will not receive vaccination, and school programs that depend on federal funds will be discontinued as will many other frontline services. However it decides to do it, America has no choice but to tighten its belt and learn to live within its means.
To continue relying on other nations’ savings to fund America’s wasteful lifestyle and military adventures abroad will drain the dollar of its remaining value, and will put an end to its long career as a reserve currency. The possible repercussions are frightening. Even China, which holds the bulk of its reserves in US dollars, and which has lent America more money than any other country, will not be able to insulate itself from the aftershocks of American economic failure.
Like many troubled countries in Southern Europe today, we, too, once found ourselves at the brink of sovereign default. We remember swallowing the harsh conditionalities imposed by the IMF that almost choked the Philippine economy. America, of course, will not take orders from anyone on how to manage its finances. Some nations may sneer at this, but no sensible person or country can draw pleasure from seeing this giant grope desperately for solutions to the problems it has brought upon itself.
* * *