AS I SEE THINGS: America’s fiscal cliff
Given the current fiscal situation facing the United States, it is not surprising that efforts have been underway to reduce the Federal budget deficit via reduction in expenditure and increases in taxes.
And that combination of policies is the only real solution available to those in authority. Since both sets of measures represent contractionary fiscal policies, the immediate fear is that the country will once again be plunged into recession and that scenario would be bad news for the global economy that is already under tremendous pressure to grow.
To avoid any such potential effects, Democrats and Republicans have been working together to try to resolve the problems.
In the absence of an agreement, on January 1, 2013, the Budget Control Act of 2011 will take effect and the country will enter what is being described as the “fiscal cliff.”
What this means is that individuals and businesses alike will be subjected to higher taxes and “automatic” cuts in expenditure will begin. Some of the areas likely to experience reduced spending include defence, housing, education, health, food stamps, and benefits for Federal workers.
In the present environment, neither the Democrats nor the Republicans would want to see the economy go into a recession. Hence, the only available option to them is to compromise. At the moment, the Democrats are quite willing to reduce spending and raise some taxes in order to address the fiscal problem.
The Republicans, on the other hand, prefer to lower spending but are generally hesitant to raise taxes further. This diversity in the approach to finding a solution to the fiscal crisis lies at the heart of the problem.
Clearly, the failure of both sides to come to some form of agreement may, at the surface, be seen as a problem of economics. But, logically, that cannot be so since the challenges facing the economy and the consequences of inaction are well documented.
Instead, what is happening in the United States at the moment is politics at its very best or perhaps very worst.
During the election campaign, both President Obama and his Vice-President made it abundantly clear that taxes will be increased on the more affluent Americans.
They also publicly declared their intentions to grow the economy through massive spending on education, capital projects and social safety nets. The Republicans, on the contrary, vowed to reduce the size and influence of the Federal Government by cutting spending and avoiding tax increases especially on the middle class and small businesses.
Now that the elections are over, both sides are determined to stick to their guns, even while recognising that some degree of flexibility is critical at this stage. It is for this reason that the Speaker of the House offered his “Plan B” with higher taxes on the rich.
But, the conservatives in his Party have rejected that proposal, arguing that they were not elected to raise taxes on anyone.
Even though the stalemate continues, I could only hope that good sense prevails and that politics is set aside allowing economic reasoning to triumph because in the end, neither America nor the world economy could afford another financial and economic crisis entering 2013.