American Economic Policy Has Sunk into a Dilemma

On the one hand, if, for the purpose of exciting short-term economic growth, America continues to extend its current tax cut policy, the American government’s financial income will be far lower than its expenditures; on the other hand, if, for the purpose of easing the pressure of the financial deficit, America implements a policy to reduce expenditure and increase taxes, America’s weak economic recovery will undoubtedly be suppressed.

Recently, with the approach of America’s presidential election, the Democratic and Republican parties’ contest revolving around adjusting economic policy is heating up with each passing day. Some experts point out that the inability to find an appropriate solution for America’s “fiscal cliff” problem will bring about a strong attack against American economic recovery, so much so that within the first half of next year the American economy could very possibly relapse into recession.

The so-called “fiscal cliff” mainly points to the fact that if the U.S. Congress does not alter relevant laws, the tax cut policy from the time of the Bush administration will expire at the end of the year; at the same time, with the deficit reduction “super committee” unable to reach a consensus, based on the agreement reached by the Democratic and Republican parties last summer during negotiations centering on the debt ceiling, an automatic deficit reduction mechanism will be set in motion next year that is predicted to cut down federal government expenses by a total of $1.2 trillion within the next 10 years.

Facing the “fiscal cliff” problem, American financial policy has already sunk into a dilemma. On the one hand, if, for the purpose of exciting short-term economic growth, America continues to extend its current tax cut policy and does not implement appropriate steps toward financial consolidation in the next few years, the American government’s financial income will be far lower than its expenditures, and the resulting financial situation will obviously be unsustainable; on the other hand, if, for the purpose of easing the pressure of the financial deficit, America implements a policy to reduce expenditure and increase taxes, America’s weak economic recovery will undoubtedly be suppressed. Currently, the “fiscal cliff” problem is already together with the continuously fermenting European debt crisis; the two are seen as two huge risks that are threatening the recovery and growth of the American economy. The other day, the Congressional Budget Office issued a report, saying that if the government falls off the “fiscal cliff,” the American economy would shrink by 1.3 percent in the first half of next year, prompting another decline into recession.

The potential threat of the “fiscal cliff” on the recovery of the American economy has already triggered extensive anxiety. On July 3, Christine Lagarde, the Managing Director of the International Monetary Fund, warned that the political standoff possibly caused by focusing on the budget and debt ceiling will shake the entire world’s confidence, and American policymakers should avoid the “fiscal cliff” emerging at the end of this year. Chairman of the U.S. Federal Reserve Ben Bernanke has also recently warned numerous times that the “fiscal cliff” could possibly cause a blow to the growth of the American economy. He said that if the U.S. Congress and the federal government continued to adopt no position toward the “fiscal cliff,” then there could possibly be suppression of economic growth, and that the federal government absolutely did not have the ability to resist this kind of huge blow to the economy.

However, so far the Democratic and Republican parties are still uncompromising on the topic of how to appropriately solve this issue. Democrats are inclined to only extend tax cuts for the middle class and cease tax cuts for the wealthy in order to demonstrate social fairness. U.S. President Obama expressed on July 9 that he hoped Congress could extend by one year the tax cuts enjoyed by members of the middle class earning an annual salary under $250,000, while at the same time ceasing tax cuts enjoyed by the wealthy, in order to increase the government’s financial income and stimulate economic growth. Obama said that many American families are still facing the economic difficulties of the post-economic crisis high unemployment rate. He said that policymakers’ current most important tasks are to accelerate the pace of job creation and reconstruct a sense of economic security for the middle class, as the livelihood and consumer spending of the middle class is extremely important for the recovery of the American economy.

However, Republicans, on the grounds that it’s inappropriate to increase taxes during a time when economic recovery is lacking in strength, are inclined to comprehensively extend tax cuts, thereby promoting economic recovery. Speaker of the House and Republican representative John Boehner pointed out that in order to achieve more powerful economic growth, America needed to lower tax rates, reduce government supervision and decrease government expenditure.

Even though falling off the “fiscal cliff” is a situation that both Democrats and Republicans want to avoid, conceptual differences between the parties are foreshadowing that the fight around this issue will be extremely intense. Especially at the background of the presidential election, the mutual non-cooperation and lack of compromise between parties will further cause the “difficult birth” of policy. Experts generally believe that, prior to the November election, it will be very difficult for the two parties to achieve substantial breakthroughs with regard to issues like tax reform, reduction of the financial deficit and increase of the public debt ceiling. Because of this, some experts suggest that, if the prospects of American economic recovery worsen, the U.S. Federal Reserve should consider launching a new first round of quantitative currency relaxing policy in order to hedge the negative impact of the “fiscal cliff.”