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Handelsblatt, Germany

Is the “Fiscal Cliff”
a Toothless Monster?



By Markus Zschaber

The so-called “fiscal cliff” in the United States is a hot topic of discussion. Will the American economy collapse if the political parties can't reach an agreement? Here's how the outcome might look.

Translated By Ron Argentati

7 December 2012

Edited by Lau­rence Bouvard

 


Germany - Handelsblatt - Original Article (German)

The “fiscal cliff” is being passionately discussed in all the important American media outlets. Possible dangers that might arise from it are urgently reported back to the public. More than a few of the media outlets are talking about a “monster” that threatens the economy.

When I listen to the various analyses of the leading protagonists on this subject, I could easily get the impression that both political parties are nowhere close to agreement on a compromise.

A look at the facts: President Obama won re-election with a clear mandate based on his campaign promise to raise taxes on the wealthy. The many statements coming from Democratic members of Congress with a decidedly liberal bent confirm the importance of that issue. From that emerges the probability that the likelihood of the president approving a deal with Congress that continues to protect the rich is slim to none.

On the opposing side stand those Republicans who are just as much in the thrall of the so-called “tea party” with their decidedly radical ideas. They were successful in convincing a number of members of Congress to sign a pledge never to raise taxes on the wealthy under any circumstances. When one considers how strongly this tax pledge has migrated into public opinion, one is justified in speaking of a party “dogma.” The populist effect couldn't be greater.

So the political battle lines between Republicans and Democrats are hardening. Which raises the question of just how dangerous the hotly debated “fiscal cliff” will really be should no compromise be found.

The bottom line is that I'm certain the whole issue is being hyped far more than it deserves. Should the United States indeed plunge over the “fiscal cliff,” it should be remembered that the whole U.S. economy is in considerably better shape than it was just a few months ago. Likewise, remember that the damage will emerge only gradually.

This means the Democrats would be justified in taking the risk of going over the fiscal cliff. A Republican surrender within a few weeks would follow because the political pressure would be unbearable. Basically, I estimate the Republicans, despite all their political posturing, to be highly flexible. At the end of the day, the fact is that the Republicans don't want to have to explain to voters that they were responsible for an economic downturn that ultimately resulted in increased unemployment.

I'm certain the Republicans will play ball. I think they grossly underestimated the medial effect and are now scrambling to save face while also trying to come up with a safe route over the “fiscal cliff.”

One solution could possibly look like this: The top earners in the USA would have to give up some tax benefits. There's no way around that presidential resolve. But in return, measures could be adopted that basically benefit the Republicans.

In this way, the “fiscal cliff” could eventually prove to be a toothless monster.




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