As the end of 2012
approaches, politicians, economists, and the greater American public in general
wait with abated breath at the oncoming fiscal cliff that is about to sweep
across the United States. This surely qualifies as an economic phenomenon that
is bound to affect the greater part of the world. Or is it? Perhaps America’s
Cliff Hanger knows a thing or two. I’ll get to that.
Could it be even
possible that this so-called fiscal cliff
is nothing more than a figment of one person’s genetically risk averse mind? But
also a mind that is creative, with a nationalistic inner motivation? Whatever
his drive and determination was, the US Federal Reserve Chairman Ben Bernanke
effectively captured the attention of lawmakers and the broader public when he
used the term “fiscal cliff” earlier this year to describe the country’s
impending economic progression into recession at the end of this year. It was a
very bipartisan move from Bernanke at that time and sounded like a really good
idea too.
Why not use a very
real and sizable public threat to rally bickering politicians into compromising
and collaboration? Except that the threat didn’t work. The purpose of threatening
American politicians and lawmakers of a fiscal cliff was to force a cooperative
outcome in an increasingly uncooperative undertaking. But this backfired in the
absence of a credible enforcer and an insufficient amount of mutual assurances.
In the end, the parties involved felt that they had more to gain from the
uncooperative behaviour. The perception that came from sheer public pressure caused
politicians on both sides of the US Congress political divide to view any
compromise as a sign of weakness.
So what is this “fiscal
cliff” that has stirred up an entire nation so much? It is basically the very
combination of tax increases and spending cuts that is scheduled to begin at
the end of this year after the expiration of the Bush-era tax cuts. It is not surprising
that the term “fiscal cliff” was abused by the media to whip up a financial
hysteria among the populace. The media, after all, thrive on dramatic
headlines. Its dramatization of the impending financial and economic outlook in
the US is akin to the Y2K sensation more than a decade ago.
To coin such an
outlook to that of a “cliff” is to say that if you stepped off an edge, you
would fall very fast without any control at all to your relative speed, and
fall very hard, and then not get up for a very, very long time. This is
Bernanke’s dramatic version.
But we all know that
in reality, the scheduled financial changes resemble more of a fluid problem –
a kind of fiscal “slope” if you will. Income withholding takes a long time to
adjust so the full effect of tax increases will not be felt immediately. The
government also has discretion regarding the implementation of spending cuts,
which will be in phases and within the government’s control. This is the
non-dramatic version.
America and the world
could really use a little less drama from the media. The usage of words here to
describe the country’s financial situation matters greatly because it sends
people into panic – people in places of high power, reach and influence. That
is why there are even talks of people who want to make big cuts in Social
Security and Medicare – the country’s two main entitlement programs. This
creates a mentality of self-preservation and survival within the government; if
we are about to head off a cliff, extreme measures need to be taken. Cutting
pensions, unemployment benefits and health care certainly qualifies as completely
inappropriate and unnecessary.
In a less extreme
scenario, the very people who refuse to consider raising taxes – Republicans in
the US Congress’ House of Representatives – will then suddenly find themselves
with a very weak hand indeed, if faced with a fiscal slope instead. Be that as it may, the House Republicans will persistently
refuse to vote for any increases in tax rates during the current lame-duck
congressional session.
So, it’s very
unlikely that congressional Democrats and Republicans will come to an agreement
in extending the Bush-era tax cuts for the middle class, while allowing them to
expire for the rich. They will keep on bickering with each other legislatively
until the last week of the year, then step onto the brink of the supposed “cliff”
and see who blinks at the last moment.
But it won’t be
either the Democrats or the Republicans who blink. On the contrary, and
transcending the line-up of the Congress – enters America’s very own Cliff Hanger
star – Obama, who will step off the “cliff” and take the fall, but not in the
way our minds traditionally associate a fall with. The President has the power
to make an executive decision and veto any extension of the Bush-era tax cuts
that will expire by the end of this year.
How does the single
act of an individual will uphold the fiscal legislative democracy of this
country? When the tax rates have been restored to its previous level, Obama
could present his own tax-cut plans that will provide a greater benefit to
lower-income Americans, as was promised during his presidential re-election
campaign.
How will Obama’s new
tax-cut package be different from the one before? It is a simple process of linear
mathematical efficiency – of identifying the constant and the variable to form
a replicating model. Benjamin Franklin once shared that “in this world, nothing
can be said to be certain, except death and taxes”. And we know that nothing is
more volatile than the economy. So tax cuts will be linked to the state of the
economy. As employment recovers, tax cuts will wind down. Conversely, a larger
tax cut could be proposed should the economy outlook in 2013 is anticipated to
be weaker. Either way, this approach gives America’s long-term fiscal prospects
a more viable solution.
What will then happen
to the congressional gridlock in Washington? A smart leader is a person who
gets you to do what he wants, by making you think it was your own choice. So,
the House Republicans will now be presented with a choice – do they vote
against Obama’s tax cuts week after week that would actually help millions of
Americans while letting the economy decline? Or do they vote for a deal that
cut taxes relative to where they would be otherwise? The latter choice gives
the House Republicans leverage over the tax cut rates, while consigning them to
Obama’s tax-cut package. With this, the House Republicans not only endorse a
deal that supports the economy, but also restores revenue to the level preceding
that of the disastrous Bushonomics experiment. And restoring revenues to the
country was the centrepiece of Romney’s Republican presidential campaign. This
is a win-win scenario for the US Congress as a whole.
If and when the US
vetoes the extension of the Bush-era tax cuts and enact the Obama tax cuts, I’d
be curious to see how Obama’s plan to tax the upper 2% income earners can help
fix the economy. Because that figure will bring in $80 billion a year – the government
currently spends approximately $10 billion a day, where $4 billion is borrowed.
In short, taxing the super-rich will run the government for 8 days!
So how does this add
up? While tax cuts are increased for the super-rich and decreased for the
middle class, spending cuts will even the scale a little on the other end of the
fiscal spectrum. But Obama has also been known to put in place spending cuts on
the table that are greater than what would normally please his electoral base.
In the end, as
America heads steadily down the fiscal slope in early 2013, the big question
remains whether they can strengthen revenue in an appropriate manner that is
consistent with its renewed economic growth. Because this very fiscal slope will
give Obama the edge to turn the historical partisan political gridlock in
Washington around and even possibly bend history in the process,
culminating in a potential economic decline, rather than an economic recession.
On a somber note, my thoughts go
out to the tragedy of the Connecticut school shooting for the 28 lives lost,
including 20 children.