America's Fiscal Cliff

Racing toward the fiscal cliff

Seattle Times,

6 August, 2012

I haven't written about the so-called fiscal cliff because, against increasing evidence, I hold to Abba Eban's quote, "When all else fails, men turn to reason." 

But maybe not in today's America.

The fiscal cliff is the set of budget cuts and tax increases that would automatically kick in next year. That is, unless Republicans and Democrats, the Congress and the White House, can agree to new tax and budget provisions, especially the shape of extending the Bush tax cuts. If we fall off the cliff, according to the Congressional Budget Office, the total effect could mean a 3.9 percent contraction in the growth rate of gross domestic product next year.

The fiscal cliff is replacing the eurozone crisis as the big deal facing the U.S. economy. As the New York Times reports, businesses are reducing their investments for fear that reason won't prevail. "Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill."

President Obama and most Democrats want to extend the tax cuts, but only up to $250,000 in income (yes, even for top earners). Most Republicans want all the tax cuts to continue and Mitt Romney pledges to attack the deficit by aggressive spending cuts (mostly unspecific except for his antipathy toward the relatively tiny help for Amtrak) but not for the defense budget. Interestingly, both sides accept the right-wing starting point of the need for austerity, despite the disastrous results in Britain and the fact that U.S. Treasuries are a safe haven and weren't affected by last year's downgrade. The borrowing costs for an economic stimulus would never be better. But nobody in power is proposing it, despite the poor economy.

The always essential Ezra Klein at the Washington Post offers this useful primer to the fiscal cliff.

The larger risk is a repeat of last year's budget deadlock, a sign that America can no longer govern itself. That, and not reverting to Clinton-era tax rates, is the biggest danger to the economy. Ironically, Obama is taking what would once have been a conservative position. Today's conservatives are really pushing forward a revolution, believe in it or not, without precedent in American history outside the imaginations of the likes of Ayn Rand. And as Mao said, "A revolution is not a dinner party."