The Wisdom in Avoiding the Worst Case in America’s Financial Cliff

While there has been a period of optimism, dark clouds have begun to gather, as President Obama and opposing Republicans are stuck in a stalemate.

The Republicans gave up on coming to an agreement before Christmas and will resume discussions after the break. During this single week, it is do or die.

If the confrontation persists and a breakdown occurs, there is a fear that the American economy could fall into negative growth next year. This would have a serious impact on the global economy; a hard blow to the Japanese economy would be inevitable. This would no doubt prolong the recession.

They must do everything they can to avoid the worst-case scenario of falling off of the cliff. It will not be easy, but there should be a way. We hope they will be able to utilize their wisdom liberally, concede where they are able to and work stubbornly towards a solution.

The fiscal cliff is composed of the problem of the “Bush tax cuts” from the last administration, which will be expiring at the end of the year. Included are social security tax cuts for workers, combined with the beginning of mandatory budget reductions that are a part of the new year’s financial reforms, the implementation of which will result in a sudden tightening of public finance.

The U.S. Congressional Budget Office predicts that if they are unable to avoid the cliff, the 2013 fiscal year will result in a $503 billion cut to the deficit and will strike a serious blow to the American economy.

The focal point in the discussions for the Republicans regarding the tax increase on the wealthy—which will take effect when the large scale tax credits expire—is what level of annual income should be considered wealthy.

Mr. Obama insists that anything over $250,000 should placed in that category, but has compromised to $400,000. Republican Speaker of the House John Boehner, who opposes tax increases, has approved tax increases for those who earn over $1 million. As the deadline approaches, it is natural for both sides to show their willingness to compromise.

However, looking to maintain leadership in the negotiations, Mr. Boehner suddenly proposed that they could consider something less than $1 million. Conservatives within the Republican Party that are opposed to any form of tax increases abandoned any calls for a vote, running that ship aground.

Having received this response, Mr. Obama expressed his thoughts on pushing for an extension on middle income tax reductions and unemployment benefits before the end of the year. The budget expenditures that the Republicans are prioritizing are something that can be postponed to the next year, as an appropriate emergency escape plan. We want to expect more flexibility from the Republicans.

In addition to the pros and cons of cutting public benefits and the size of revenue over the next ten years, there are many other points of contention within the Republican party. Mr. Obama has shown that he wants to make a comprehensive fiscal reform plan in the new year. Whether or not discussions with the opposition will be successful is a matter that will be watched closely.

When the discussions broke off last week, average stock prices fell in both the New York and Tokyo stock exchanges. There is a fear that all of the hard work invested in moving towards a cheap yen with high stock prices will be in vain.

For the Cabinet Office, in the situation where they can’t avoid a breakdown, the decrease of American investment and consumption will push the Japanese real growth rate down to 0.4 percent, and, including the high price of the yen, could dip even further.

There are only six days before they fall off of the cliff. The effect of that would be unfathomable. We hope they don’t forget that the whole world is holding their breath, watching.