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Two Cheers for the US Fiscal Cliff

Falling off would hurt too much not to avoid it

By Brian Lee Crowley Created: November 15, 2012 Last Updated: November 15, 2012
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U.S. President Barack Obama (C) speaks to the media in the East Room of the White House, as Vice President Joe Biden (L) listens on November 9, 2012 in Washington, DC. President Obama said he invited Congressional Republican leaders to come to the White House to discuss ways of the avoiding the so-called fiscal cliff at the end of the year. (Mark Wilson/Getty Images)

U.S. President Barack Obama (C) speaks to the media in the East Room of the White House, as Vice President Joe Biden (L) listens on November 9, 2012 in Washington, DC. President Obama said he invited Congressional Republican leaders to come to the White House to discuss ways of the avoiding the so-called fiscal cliff at the end of the year. (Mark Wilson/Getty Images)

Far from being a harbinger of the End of Civilization As We Have Known It, the fiscal cliff that has so frightened Americans and Canadians is doing exactly what it is supposed to do, and we owe a debt of gratitude to its creators.

Like the prospect of a hanging in the morning the possibility of dragging the U.S. economy back into recession is rightly concentrating the minds of all the members of Congress on the country’s out-of-control finances and burgeoning debt.

Our own less than stellar growth would likely also be badly damaged.

For those not familiar with the fiscal cliff, a quick primer: partly by accident and partly by design, a breathtaking concatenation of measures will all kick in at midnight on New Year’s Eve – unless Congress decides otherwise. These measures include some stiff tax increases (for example, the expiry of the tax cuts enacted under former President George W. Bush and last year’s temporary payroll tax reductions, in addition to the new taxes needed for Obamacare).

Also pending is a series of spending cuts affecting over 1,000 programs in Washington. Hardly anything will be spared: defence, social programs, and Medicare, for instance, would all be sliced. Extended unemployment insurance benefits would also expire.

The cumulative effect is about $560 billion being taken out of the pockets of American consumers, whether as tax increases, benefit cuts, or lost public service salaries. The Congressional Budget Office, a non-partisan organisation serving Congress’s need for expert advice on the effects of budget and other economic measures, thinks all this would reduce the size of the American economy by about 3.5 per cent. Since that economy has been quite anemic, our neighbours would find themselves back in recession just as they were beginning to show a little spark.

Since we send about two thirds of our exports south, and since a recession-wracked U.S. buys less from foreigners like us, our own less than stellar growth would likely also be badly damaged.

Crazy eh?

I beg to differ. Remember, a good part of the fiscal cliff was designed to provoke exactly the reaction we are all having. It was to strike fear into the hearts of politicians, journalists, and voters so they would think seriously about solutions. To that extent it is working brilliantly.

The Bush tax cuts were extended just long enough that they would expire after last Tuesday’s election. The spending cuts were part of the deal struck between Democrats and Republicans during the battle over raising the amount of money the U.S. government is authorized by Congress to borrow (the famous “debt ceiling”).

The debt ceiling could not be raised without the agreement of the House of Representatives. This gave the Republicans leverage that they used to work out a deal providing some prospect of getting America’s addiction to debt under a modicum of control. A bipartisan commission was struck to examine both spending and taxes, and to recommend a strategy that might win broad support in Congress.

To make sure people took this effort to find compromise seriously, a good part of the fiscal cliff was created. The thinking was that if they made the penalty for failure sufficiently severe, the incentive to find a budget-balancing solution that would win bipartisan support would be overwhelming. That’s why the proposed spending cuts gore Democratic sacred cows (e.g. Medicare) and Republican ones (defence). The plan was never to enact these measures, but to come up with a “hammer” so painful that failure to find a more moderate solution would simply be too devastating to contemplate.

Alas, in the hyper-partisan atmosphere of Washington over the past two years, the necessary compromises were not forthcoming and the commission’s work was stillborn. But the clock is still ticking on the fiscal cliff, a time bomb that draws nearer every day.

Fortunately, the timing is not bad. The election is over and the next one is two years away. Even in America they won’t start campaigning again for at least a few months. U.S. President Barack Obama’s prestige is somewhat enhanced by his re-election, and on Friday he publicly committed himself to finding a solution and asked Republicans to do the same. Leaders of the majority parties in both houses of Congress are sounding conciliatory notes. No politician wants to be blamed for dragging America back into recession. If there ever was a moment when compromise might be possible, this is it. But without the fiscal abyss beckoning, the incentive to deal would be meagre.

A punt is the most likely short-term solution, but the Republicans will not agree to getting rid of the cliff permanently. One day America must wake up and fix its finances. These periodic crises will make that moment come sooner rather than later. Two cheers for the fiscal cliff.

Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca. Article courtesy TroyMedia.com

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