US Heading toward a Recession

The U.S. Congress, paralyzed and divided, shows an inability to go forward with an agreement avoiding the fiscal cliff. Democratic leader Harry Reid has stated that the United States “is heading” toward a large increase in taxes and spending cuts that would begin Jan. 1.

There are still four days to stop it; however, pessimism has settled into Washington before the resistance of both parties to yield in their ideological positions about the budgetary priorities and deficit reduction. This Friday, the U.S. president will meet with Senate and House leaders to try to come to an “in extremis” agreement.

To confirm this pessimism, Reid used this morning’s Senate meeting to affirm that, unless the Republicans accept the Democrat’s original proposal which included a tax hike for people who earn more than $250,000 a year, the fiscal cliff will be inevitable. The possibility that the opposition will accept these conditions is minimal but not obsolete. The House of Representatives, dominated by Republicans, still has not even met. Their leader, John Boehner, is still on vacation in Ohio, where he is thinking about holding a phone conversation tonight with his fellow Republicans to decide on the next step. However, it was previously stated that the House will not act until the Senate does not do it.

Conversely, Barack Obama is in Washington, but his ability to maneuver is minimal. Wednesday, before leaving Hawaii, he spoke by telephone with Democratic and Republican leaders from both chambers, but no progress was made from these conversations. Nonetheless, the last hopes of finding a way out of this situation lay in their hands.

Today, the White House considers the possibility of submitting a new legislative proposal that could be approved by Congress before Jan. 1. It is difficult to imagine how it would be able to avoid the Republican Party’s filibustering in the Senate and be able to gather enough votes to pass it in both Houses. The Republicans oppose any tax hike. The Democrats and the president reject spending cuts without raising taxes on the rich. So, how do they get out? Obviously, they get out with concessions. Who can do it? For the moment, no one — or no one generous enough.

Meanwhile, the drama continues. The New York Stock Exchange is still sinking and the Dow Jones Industrial Average has fallen below 13,000 points. Investors predict a strong fall in consumption and an inevitable return to the recession, if the country falls off the fiscal cliff. Close to 90 percent of the population will have to pay more taxes as of Jan. 1. A family that earns on average $50,000 a year will see an increase in their contribution to the IRS by more than $2,000. In 2013, more than 2 million Americans will lose their unemployment benefits, and unemployment will increase to 9 percent.

There should be enough reasons for the political class to act responsibly. Unfortunately, the purely political incentives are scarce for both parties. If the country falls off the fiscal cliff, the tax benefits from George W. Bush will expire, and the Democrats will have their tax hike on the rich. If this occurs, Republicans will have $55 billion in spending cuts that they consider necessary. Both parties will be able to boast about not having yielded to their rival before their electorate. Both will be able to say that they will continue trying in the next legislature, under more favorable conditions.

The next session, which convenes on Jan. 3, presents a better view of the current negotiators. Boehner will probably be re-elected president of the House. He has been liberated of some of the most annoying members of the Tea Party, defeated on Nov. 6. The Democrats will have a deeper majority in the Senate — although insufficient to avoid filibustering — and will improve their position in the House.

Postponing the negotiation will demand some type of agreement now, since the law of the fiscal cliff will come into effect on Jan. 1. Any legislative repair to save this limit can free the citizens of some losses, but they will not be able to avoid the damaged inflicted to American credibility. The world isn’t worried, and rightly so, not only by the consequences of an economic crisis in this country, but also, by the governing crisis that the first power is showing.

The fiscal cliff is only one of the signs of a larger problem. The secretary of the treasury announced that the next day, Dec. 31, the U.S. will increase the congressionally-approved debt ceiling. At the moment, they have resorted to provisional instruments that allow for an extension of credit for a few more months; however, in February or March, Obama will need the support of the majority of both houses to avoid the country’s falling into a suspension of payments, a risk that they already experienced in the summer of 2011.

There are too many linked crises to not affect the prestige of the U.S. Obama appears to be conscious that historically, the main responsibility will fall on him as president. He is the most prepared to yield, but to what point?