America's Cliff Hanger

 

 

 

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.