The Fiscal Cliff, or the Enshrinement of Inequality

The double squeeze of a decrease in social spending and a drop in consumption because of tax increases will produce a fierce economic shrinkage, which will devastate the most vulnerable.

All the numbers within corporate accounts and those of the real economy will turn over. Those that seemed good and promising will finish terribly in the red and those that were improving will revert to the abyss. This is not another Mayan prophecy, but rather the chasm that has once again opened under the feet of the American people.

In practical terms, it is the naked exhibition of real weaknesses that the leading power of the world still has not overcome.

Underneath the mask of such a shaky recovery, the pretty face does not appear as promised.

If nothing is done before the last minute of the year, the program of tax benefits in favor of the rich put in place by George W. Bush will expire. This change does not imply, however, a linear adjustment of that deformity questioned by economists on the right and left which to a large extent explains the fiscal troubles of the North American superpower. If there is no agreement in time about how to rein in those red numbers, an abrupt general tax increase will be triggered which will essentially knock the wind out of the large American middle class, at the same time that an assortment of social program budgets will be cut.

The combination of the two, that which is cut and that which is added to the cost of families, comes to around $700 billion. It is nothing short of five percent of the gross national product of the great world power. That is the size, in provisional terms, of the famous fiscal cliff. But we are just standing at the gates of hell. The consequences of that black hole are of a procyclical energy of such scope that the recession will return, turning Barack Obama’s speeches on the recovery of the country into an illusion.

It is a very tough setback. The U.S. has kept growing, as opposed to Europe, at an average rate of three percent, but this crash is already on its way, with the country barely holding on to around one percent growth in the last quarter of 2012. These numbers scare the world because they anticipate a decrease in global economic activity; it will deepen European wounds and slow down the Chinese rise, China being a principal trading partner of much of Latin America. If there is no agreement, which did not seem likely over the weekend, this double squeeze, a decrease in social spending and a fall of consumption because of tax increases, will produce shrinkage in the American economy leaving it at barely above zero growth by the end of next year. Additionally, there will be three and a half million more unemployed individuals, causing the unemployment percentage to jump from the current 7.7 percent to 9.2 percent. Put in these terms, it indeed seems like the end of the world.

However, it is good to be a bit cautious about the meaning of a cataclysm in which not everyone is a loser.

Democrats and Republicans have not come to an agreement that ends this duel, due to, as the story goes, an unquestionable ideological gap. According to this theory, the opposition, made up of a tribe of fundamentalists from the Tea Party, refuses any plan that carries with it a tax increase, which is the formula that Obama offers up. If the government needs money, it will obtain it by increasing the tax burden on the richest, those that earn over $400,000 annually, a level that the White House consented to raise from $250,000. This is, plainly stated, those that earn more than $33,000 every 30 days. The aim here was to preserve the wallet of the middle class as well as the upper portion of the tax hike, while still being careful not to affect consumption. The Republicans responded that if the government needs money, it should obtain it by making massive cuts to social assistance plans that cover precisely those that are far removed from those income levels, and who depend on the Medicare program that protects the elderly and Medicaid, which covers poor Americans of any age. Do not start to think that those in poverty are few. According to the last census, there are around 50 million people in poverty in the U.S., a sixth of the total population of the country considered to be the richest in the world. If the mask of prosperity is removed, you will also discover that one in seven Americans deals with food security problems.

In spite of this not-so-hidden scenario, the dispute came to such crazy levels that an attempt was made by a group of Republicans in the House, the chamber they control, to keep those that earn up to a million dollars annually (a base monthly salary of $83,000!!!!) free from the appetite of taxation. It failed against the dogmatism of the Tea Party extremists.

That is how things are. In the new year, families that earn between $4000 and $6000 monthly, which is the majority of the U.S. population, will need to handle a tax burden increase to the order of $2,500. If one takes into account that this low-income portion has been growing after the devastating crisis in September 2008, which has not been resolved at all, as stubbornly demonstrated by reality, the conclusion is that the huge weight of the fiscal hole in which the U.S. finds itself will fall upon the shoulders of the less advantaged in the complex American social map. In the Darwinian logic of this pyramid, the best protected, in economic terms, will have a lower tax liability that will keep being refined further, until much higher symbolic levels are built in the distribution framework such that tax payment will not matter to them.

From this observation one could make a perverse conclusion. If nothing happens and the abominable fiscal cliff devours the U.S., there will be an automatic cut of social spending, to the delight of Republicans (as well as defense cuts, although in insignificant amounts), and taxes will rise along the whole chain, to the delight of Democrats. Assuming these joys are simple ideas, like that of believing that the ideological dispute is so radical between these two parties that will be seen communicating more comfortably in January. There enters the perversity, because a huge national burden will have been initiated with the wink of both political factions: a brutal adjustment of the economy that the disadvantaged sectors of society will end up paying. This is nothing that should be surprising, of course.