Hurrah for the Great Yankee Chief!
The budgetary agreement reached in overtime by the U.S. House of Representatives is much more than a mere patch-up job. Though it might seem mediocre because it postpones a decision over spending cuts – especially in social policies, thus necessitating another year of argument – these only accounted for $136 billion out of the total fiscal cliff package of $668 billion: that’s just 20.3 percent. Given that tax rises will near the $532 billion outlined in Obama’s original offer, the job should be considered 80 percent complete, rather than just half done. Those melancholic souls who are so used to treating all good news with a healthy dose of cynicism had better at least turn to the four basic rules of arithmetic.
The agreement brings great relief, as well as obvious tangible benefits for the economies of the U.S., Europe and the whole world. Yesterday, markets across the world made sure to shout it from the rooftops. Here is why:
1. It staves off a recession
A disagreement would have set off tax hikes and drops in investment; less money circulating and less internal demand would have lead to a recession. The $668 billion package was equal to almost 5 percent of the U.S. GDP. Its impact would have been drastic and immediate. It is calculated that it would have reduced GDP by 2.4 percent, instead of the 2.4 percent growth that the IMF predicts for 2013. All told, it would have been a fall of around three points. The devastating effects of that eventual recession loomed over Europe, because – as we saw with the crash of Lehman Brothers in September 2008 – recession is a quickly contagious disease, because the EU is its main commercial partner and thus the one that would stand to suffer most, and because the Eurozone is already negotiating its second recession and any adversity always afflicts the most vulnerable most acutely.
2. It assures policies of expansion
Following the agreement, Barack Obama will be able to continue with his current economic policy to pull the U.S. out of the crisis, namely that of using moderate stimulation of demand as a lever for growth, with increased social spending (especially in healthcare), public investment and interest rates of zero so as to stimulate private investment. More akin to the French model, say, than to the German, with the good results that the figures attest to – growth, while Europe has remained in a state of stagnation or recession. All of the above, while increasing benefits. Remember, in 2012 the IMF predicted that the American deficit would rise to 8.7 percent of the IMF, almost trebling that set out in Maastricht. Obama has promised to reduce it, but very slowly.
3. It is possible to be decisive
The coexistence of a Democratic president and a Republican Congress (or vice versa) can end up paralyzing the decision-making process, as appeared likely in this case. Not for the first time: During Bill Clinton’s presidency, Congress systematically blocked his attempts to fast track decisions, in that case to expand the continental Free Trade Agreement to the south. These are both enlightening examples of how the decision-making of a federal state like the U.S. is not always more seamless than that of a federation of states like the EU, no matter what the naysayers or anybody else frustrated by the latter’s slow policy decisions might say. Plus, the United States appeared more susceptible to the attacks of rating agencies over the fiscal cliff than the EU for its insufficient budgetary discipline. In August 2011, Standard & Poor's downgraded federal debt, something that it has not done for the bonds issued by the European Investment Bank or the European Financial Stability (Rescue) Fund, the European assets most akin to federal bonds. In any case, democracies are slower than dictatorships, but it has been proven that they are capable of decisive action.
4. It sees off the threat of the blinkered right
The tea party-influenced Republican far-right has been defeated. It refused to engage with the slightest possibility of tax hikes, and anything that suggested that the State would become more visible or powerful. Like Ronald Reagan, it believed that “government is the problem.” It took all the wrong lessons from the Wall Street crash, falling back on the same old rhetoric of deregulation, privatization and tax exemptions – the very recipes that caused the Great Recession. The blinkered right is still alive, but more measured Republicanism has seen it off thanks to the scale of Obama’s election victory, an imminent liberal shift in the House today (thanks to the last mid-term election) which left outgoing members without a leg to stand on, and the president’s determination to hold these figures publicly accountable.
5. It encourages comprehensive tax reform
The touchstone of the agreement is a dose of equality. New social services will be financed in greater measure by the super-rich 2 percent, who have reaped the benefits of an unequal distribution of wealth in the last 30 years. Marginal income tax rates are rising from 35 percent to 39.6 percent, still much lower than in Europe, and inheritance tax is going from 35 percent to 40 percent after the first $5 million, against the Republican push to leave it as it was.
But a comprehensive tax reform is required in the U.S., whose system has more loopholes than a sailor’s knot; deductions, exemptions, tax credits, special preferences and other ways out amount to up to 8 percent of the GDP! The EU must also head toward a more wholesale, less fragmented tax system. Forget about Spain; here, businesses pay an actual rate of 11.6 percent of corporation tax, instead of the nominal rate of 25 percent or 30 percent, precisely because of the plethora of special cases. Income tax no longer performs its redistributive purpose, having gradually turned into a tax on workers.
The agreement brings great relief, as well as obvious tangible benefits for the economies of the U.S., Europe and the whole world. Yesterday, markets across the world made sure to shout it from the rooftops. Here is why:
1. It staves off a recession
A disagreement would have set off tax hikes and drops in investment; less money circulating and less internal demand would have lead to a recession. The $668 billion package was equal to almost 5 percent of the U.S. GDP. Its impact would have been drastic and immediate. It is calculated that it would have reduced GDP by 2.4 percent, instead of the 2.4 percent growth that the IMF predicts for 2013. All told, it would have been a fall of around three points. The devastating effects of that eventual recession loomed over Europe, because – as we saw with the crash of Lehman Brothers in September 2008 – recession is a quickly contagious disease, because the EU is its main commercial partner and thus the one that would stand to suffer most, and because the Eurozone is already negotiating its second recession and any adversity always afflicts the most vulnerable most acutely.
2. It assures policies of expansion
Following the agreement, Barack Obama will be able to continue with his current economic policy to pull the U.S. out of the crisis, namely that of using moderate stimulation of demand as a lever for growth, with increased social spending (especially in healthcare), public investment and interest rates of zero so as to stimulate private investment. More akin to the French model, say, than to the German, with the good results that the figures attest to – growth, while Europe has remained in a state of stagnation or recession. All of the above, while increasing benefits. Remember, in 2012 the IMF predicted that the American deficit would rise to 8.7 percent of the IMF, almost trebling that set out in Maastricht. Obama has promised to reduce it, but very slowly.
3. It is possible to be decisive
The coexistence of a Democratic president and a Republican Congress (or vice versa) can end up paralyzing the decision-making process, as appeared likely in this case. Not for the first time: During Bill Clinton’s presidency, Congress systematically blocked his attempts to fast track decisions, in that case to expand the continental Free Trade Agreement to the south. These are both enlightening examples of how the decision-making of a federal state like the U.S. is not always more seamless than that of a federation of states like the EU, no matter what the naysayers or anybody else frustrated by the latter’s slow policy decisions might say. Plus, the United States appeared more susceptible to the attacks of rating agencies over the fiscal cliff than the EU for its insufficient budgetary discipline. In August 2011, Standard & Poor's downgraded federal debt, something that it has not done for the bonds issued by the European Investment Bank or the European Financial Stability (Rescue) Fund, the European assets most akin to federal bonds. In any case, democracies are slower than dictatorships, but it has been proven that they are capable of decisive action.
4. It sees off the threat of the blinkered right
The tea party-influenced Republican far-right has been defeated. It refused to engage with the slightest possibility of tax hikes, and anything that suggested that the State would become more visible or powerful. Like Ronald Reagan, it believed that “government is the problem.” It took all the wrong lessons from the Wall Street crash, falling back on the same old rhetoric of deregulation, privatization and tax exemptions – the very recipes that caused the Great Recession. The blinkered right is still alive, but more measured Republicanism has seen it off thanks to the scale of Obama’s election victory, an imminent liberal shift in the House today (thanks to the last mid-term election) which left outgoing members without a leg to stand on, and the president’s determination to hold these figures publicly accountable.
5. It encourages comprehensive tax reform
The touchstone of the agreement is a dose of equality. New social services will be financed in greater measure by the super-rich 2 percent, who have reaped the benefits of an unequal distribution of wealth in the last 30 years. Marginal income tax rates are rising from 35 percent to 39.6 percent, still much lower than in Europe, and inheritance tax is going from 35 percent to 40 percent after the first $5 million, against the Republican push to leave it as it was.
But a comprehensive tax reform is required in the U.S., whose system has more loopholes than a sailor’s knot; deductions, exemptions, tax credits, special preferences and other ways out amount to up to 8 percent of the GDP! The EU must also head toward a more wholesale, less fragmented tax system. Forget about Spain; here, businesses pay an actual rate of 11.6 percent of corporation tax, instead of the nominal rate of 25 percent or 30 percent, precisely because of the plethora of special cases. Income tax no longer performs its redistributive purpose, having gradually turned into a tax on workers.