By Christmas America will be out of cash and out of ideas
By Richard McGregor
Politicians, political parties, and a hoard of billionaires supporting them have spent upwards of $5 billion on America’s presidential and congressional elections in 2012, a record amount by a wide margin.
But whoever wakes up elected as president on 7 November, and whichever party finds itself in charge of majorities in the Senate and House of Representatives, they will face the same urgent budgetary problem.
The pundits have come up with various forms of shorthand to describe the challenge that Washington has until the end of the year to solve. The “fiscal cliff” is one. “Taxmageddon” is another.
Both capture in different ways the list of issues that have long been kicked down the road by a squabbling political system and will finally come due on 1 January. This time, they will be harder to avoid than ever.
The end of the year sees the expiration of the large tax cuts brought in by George W. Bush. They had been due to expire at the end of 2010 but were extended for two years in a deal between President Barack Obama and Congress.
The expiration of the tax cuts on its own would be a drag on the economy, by taking money out of the hands of consumers and putting it into government coffers. But that is only the tip of the iceberg. Another stimulus measure the Obama Administration pushed through, temporary cuts to the payroll tax, also runs out.
On top of that, there are the deep cuts that come under the banner of “sequestration”—in other words, automatic cuts to both defence and domestic spending that kick in at the end of the year. The sequestration cuts are Exhibit One for how dysfunctional the highly partisan political system has become in recent years.
With budget talks deadlocked in 2011, Congress attempted to scare both parties into a fiscal deal by saying that if they didn’t make one, automatic cuts hurting the parties’ core constituencies (defence in the case of Republicans and domestic program for the Democrats) would kick in.
But even with the threat of sequestration hanging over them, the Democrats and Republicans in Congress could not reach agreement on how to rein in the budget.
The result is a singularly scary scenario for the Keynesians in Washington who believe that a sudden cut in government spending and a sharp rise in taxes will plunge the country into a deep recession.
The Congressional Budget Office, a non-partisan agency that analyses the effects of legislation on the finances of the US government, says that without a deal the economy will contract at a rate of 0.5 per cent in 2013.
With the economy already slowing in the lead-up to the election, the projection is substantially bleaker than its estimate in May, when it was forecast that the US economy could suffer a recession early next year but rebound strongly enough in the second half to ensure tepid growth for the full calendar year.
There are some conservatives who see sequestration as a major opportunity to force through cuts that otherwise have been impossible.
Far from being a fiscal cliff, they see the end-of-year moment as a fiscal solution.
This group, however, is a minority. The vast bulk of the Republican Party supports cutting domestic programs, like spending on the poor, but it adamantly opposes across-the-board cuts at the Pentagon.
During the presidential election campaign, both Barack Obama and Mitt Romney have framed the election as a contrast in visions over budgetary solutions.
Romney wants to cut taxes and sharply reduce spending in most areas except defence, while Obama wants to raise taxes on the wealthy in order to maintain higher government spending levels.
But even Romney does not want to impose his cuts quickly, because he thinks they would drag the economy down with them.
The most likely outcome is another temporary deal, delaying some cuts and extending tax relief. Under this scenario, the fiscal cliff becomes more of a fiscal slope. But it would be a slope that would gently wind its way down to the same place that the cliff would take the protagonists much faster—gridlock, combined with an unsustainable budgetary situation.
That is why the morning after the election is so important. It is not only the White House that is up for grabs. If the Republicans take the Senate, then, even with a victory in the presidential race, Obama will be more boxed in than ever. If Democrats hold their slender margin in the Senate, then he will at least wield some moral authority over the Republicans.
In 2012, more than ever, America needs its electorate to speak clearly about what sort of government it wants. But don’t hold your breath. In what is generally called a fifty-fifty country, look out for a fifty-fifty result.
Which means, at Christmas this year, we can all expect to go off the fiscal cliff together. The only question is at what pace we do it.