The Fiscal Cliff

President Barack Obama and congressional leaders have begun dueling over a solution to the exponential growth of the budget deficit, the amount of which climbed to $1.3 trillion in fiscal year 2011. In his first meeting with congressional leaders after the elections, it appears in principle there is willingness on all sides to discuss a way out of the problem. All of the actors are conscious that by not arriving to an agreement, there would be a crisis whose extent no one knows for certain.

A recent column in the Washington Post warns that no agreement would mean the threshold of a new economic recession that would seriously affect the United States. The credit rating agencies, the column continues, have said that without an agreement in the next few weeks, they would lower the government’s credit rating, as already happened a year ago, when the Republican majority in the House of Representatives refused to raise the debt ceiling. It would be a dreadful signal for the stock market, whose distrust of the government’s capability to negotiate an agreement would noticeably affect the nation’s economy, the column concludes.

There are those who do not share in this catastrophic scenario. They believe that the issue of the fiscal crisis is a pretext in order to pressure the president to find a solution at the expense of restricting spending and freezing taxes. Cutting spending would principally affect the budget allocation destined for health care and Social Security; freezing taxes would favor the highest-income sector. Various economists, including Paul Krugman, have assured restricting spending would have severe consequences for the economic recovery; at times when the economy is weak, to spend more in order to create jobs and increase demand is the best option. It would appear, according to Krugman, that the lesson of what is happening in various European countries including Greece has not been understood, where the central bank of the European Union, as a condition of its support, has demanded a policy of spending cuts. The result is that more than one of the continent’s nations has gone on a downward spiral with harmful consequences for the majority of the population.

Obama promised to defend the income of the middle class and the poor. During the meetings held last week with Congressional leaders and representatives from business organizations, he was firm that the only thing that is not negotiable as a solution to reduce the deficit is spending cuts to those items that benefit the middle class. He also emphasized compromise regarding an increase of the tax rate on the highest earners. Will it be possible?

In another arena, there is some good news for the immigrant population. In the context of their defeat, some Republican leaders have understood the importance of the Hispanic vote and have called for revising and reforming the dysfunctional immigration system. We will see if it goes forward seriously this time.