The season of good will and Fiscal Cliffs

22 Dec 2012

As the season of goodwill approaches, so does the impeding American Fiscal Cliff. With oil prices and stock markets already feeling the shock and fearing that no final decision will be made, important and quick minded resolutions have to be brought to the table in this hour of need. With growth in the third quarter in the United Kingdom lower than expected, especially in the key service industry, we – as well as the Americans – need this Fiscal Cliff to be averted and for stability to be restored. Accounting for one fifth of global output, this is an important holiday period not only for Americans, but for the world too.


Firstly we should address what the Fiscal Cliff would actually mean and what it would actually result in. Quite simply – it would be giant step back, not one or two but possible three or four years to the depth of the recession. The Congressional Budget Office has calculated that estimated growth in 2013 would fall from 1.7% to minus 0.5%. A period of recession would have terrible onsets in the form of unemployment – which would rise from the current 2013 predictions of 8% to 9.1%. This would increase social security benefit outputs and therefore result in greater expenditure, decreased tax revenues and create a catch 22 scenario. The solution in the gigantic economic problem, mathematically, comes from long term and sustained public investment. Investing in infrastructure reduces unemployment, increased consumer spending power and thus higher salaries, and in turn greater tax revenue. Periodically increasing public sector debt/ GDP ratio for a short period of time, by investing in the public sector to increase GDP growth the ratio begins to fall in the long-term. America needs the public sector to lead the way; it cannot rely on low business taxes and a small government. 

Political roadblocks are by far the biggest problems on the path to a safer, fairer and more stable future for the citizens of the United States. Detached Republicans, still licking their wounds from the October Presidential election defeat, seem to believe that further tax cuts will, with matched reductions in spending, somehow create stability. This is a myth. As Obama quite clearly pointed out: “the rule of the Republicans is in the good times to cut tax, in the bad times to cut tax; and if every else fails – cut tax even more”. Never a truer word said. However, the devoutly religious Republican speaker Boehner summed up Fiscal Cliff feelings and the question of how to get to the end of the tunnel with the reply: “how we get there, god only knows”. Deep divisions not only between some of the Democrats and Republicans but also within the parties indicates the lengths both the President, Boehner and Treasury chairman have to go.

The division between the Democrats and the Republicans are well known and need little explaining. By American standards one is for ‘big’ and the other for ‘little’ government, one is ‘pro’ and one is ‘anti’ tax (and you can change the word tax for healthcare, gun control, immigration or sustainable energy here). Yet they are most apparent in this debate. The Republicans wanted to limit tax rises on earnings on or above $1 million, Obama preferring either the $250,000 or $400,000 mark. The divisions between the far right and the more liberal leaning members of the Republican Party are also in particular dangerous. Let alone threatening the survival of the Party, it is also posing an impossible task for its leaders. Either option, as Boehner has analysed, will leave him in a vulnerable position with Speaker elections in January just around the corner. Such splits would also reduce the bargaining tools the Republicans have, the chips they can throw at the President and what they can expect in return.

No doubt the remaining week (and a half) will be a marathon, not a sprint when it comes to negotiations. With House members on 48 hours’ notice, time is of the essence. Nevertheless, the Republicans must begin to unite behind a single policy of ‘cliff-fall diversion’, whilst acknowledging that tax cuts alone will never be the solution. With the price of oil up nearly 10% per-barrel on Friday as compared with the beginning of the week and with the leaders of the IMF and World Bank calling on urgent action – it may be a very short break for the President and ‘friends’ this Christmas. It is vital that the leaders of the world’s largest country work together to sustain the recovery – and maybe then there really will be something to celebrate this Christmas.

By James Wand

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