The US on the Edge of the Fiscal Cliff

With no agreement between Republicans and Democrats by Jan. 1, 2013, budget cuts and steep tax increases go into effect in the U.S., at the risk of plunging the country into recession.

Just after being re-elected, Barack Obama is facing his first hurdle. A huge one, as it could very well send the U.S. economy tanking. This is the famous fiscal cliff — literally, the fiscal cliff — put another way, $500 billion of cuts and tax increases that will automatically take effect on Jan. 1, 2013 if Congress does not act by then and that, according to experts, could plunge the U.S. economy into recession in 2013.

These $500 billion are broken down as follows: Approximately $400 billion are tax cuts enacted under President Bush that benefit all U.S. households and more than $100 billion are spending budget cuts decided on during the summer of 2011. One remembers that, at the time, Republicans and Democrats, who fought against each other on raising the debt ceiling, reached this agreement that allowed them to escape default. A year and a half later, nothing is settled, as even beyond the fiscal cliff the U.S. is faced with the need to reduce the budget deficit — about 8 percent of GDP in 2011 — and to contain the explosion of debt: Every minute that passes, it increases by $3 million!

While the Democrats hold the White House and have increased their majority in the Senate (54 seats), Republicans still control the House of Representatives. In the marathon budget negotiations that are starting, the two main roles are therefore played by the same actors as in 2011: Obama on one side, John Boehner, the very tough speaker of the House, on the other side. Despite calls for compromise, the poker game is fierce.

Pen

The president drew first. In the aftermath of his election, he expressed his desire to reach an agreement with Republicans, and then out of his pocket he waved a pen publicly. He then appointed as chief negotiator Timothy Geithner, the current U.S. Treasury secretary, who will leave the administration in January 2013 to replace Jacob Lew, the White House chief of staff, who maintained a terrible relationship with Boehner. But there is one point on which he will not compromise: the need to raise taxes on the wealthiest Americans — those who receive more than $250,000 per year — to break the budget impasse. That is a position that the president hammered on throughout his campaign, and he reminded Congress’ principal leaders of it at a Nov. 16, 2012 White House gathering.

And since the Republicans, Boehner above all, do not want to hear anything about it, the problem still remains. For them, the tax rate should remain at the level of 35 percent for the richest. What are the Republicans’ proposals? To cut social programs like Medicare and Medicaid and reform the tax code in order to eliminate tax loopholes.

In both camps, the extremists who are unwilling to compromise are many. On the Republican side, we can mention Mitch McConnell, the Senate minority leader and a key player in the negotiations. In 2014 he will seek a new mandate with voters of Kentucky, which is not likely to encourage him to mute his anti-Obama sentiment. On the Democrat side, Harry Reid, the group’s leader in the Senate, will probably not be quiet either. He opposes, for example, the inclusion of social security in the future agreement — a difficult position to sustain, since rising social spending contributes to increasing the budget deficit.

Since his re-election, Obama has taken control and intends to prove his firmness. Over the past two years, he probably gave too much ground to Republicans. In December 2010, for example, he agreed to extend tax breaks for the wealthy — already! — granted by the Bush administration. The budget agreement will, in fact, determine the legislative reforms that will be undertaken during his second term.

Inflexible

At his first press conference on Nov. 14, 2012, the president mentioned among those reforms ones for immigration and global warming. He also took advantage of his momentum with a proposal to return to a balanced budget by drawing $1.6 trillion in additional revenue —double the amount that Boehner was willing to accept in September 2011! — and by being inflexible on taxation. “What I’m not going to do is to extend Bush tax cuts for the wealthiest 2 percent that we can’t afford,” he said. The operation would actually cost some $1 trillion, while it would have little impact on growth, according to many economists. But the president has been careful not to close the door on any compromise. In fact, he expressed his willingness to remove tax loopholes and said that he does not intend to return to the tax rate for the richest that existed under Bill Clinton: 39.6 percent.

On Nov. 16, 2012, Obama, Reid, McConnell and Boehner met at the White House. Afterward the four men appeared all smiles. But Speaker of the House Boehner, to whom the president offered a bottle of Italian wine for his 63rd birthday, was still a little tense. Earlier, CNN released the results of a poll showing that 50 percent of Americans would blame Republicans for the failure of the negotiations and 29 percent Democrats. The two men are probably on the edge of the “cliff” budget, but one more than the other.