Hasnat Abdul Hye
American politicians have a penchant for brinkmanship and the drama that it entails. This was seen vividly in 2011 when the Congress dithered over the extension of the debt-ceiling sending shock waves inside and beyond America. A deal was reached at the eleventh hour avoiding a sovereign debt crisis for America and thereby helped steady a skittish world economy. The worst hit by a sovereign debt failure would have been China, the second biggest economy in the world and America's biggest lender. If China was affected by the American failure to fix the debt ceiling it would have reverberated throughout the world economy miring it in a recession.
The 'fiscal cliff' that challenged American politicians with another showdown was also a threat both to America's economy and the world economy though its nature was different and consequences would have played out differently. Fiscal cliff referred to the Bush-era agreement on taxes and expenditure by the federal government which involved an automatic hike in taxes for all categories of Americans amounting to a total of US$ 500 billion and drastic cuts in federal expenditure to the tune of US$ 600 billion. The result would have been devastating. American economy barely out of the recession caused by the 2008 financial crisis would have plunged into another recession sending ripple effect throughout the global economy.
With 1st January as a deadline to avoid going over the fiscal cliff, Senators and Congressmen returned from winter holiday to Washington and engaged in what has been described as no-holds-barred horse trading. Many of the politicians had little knowledge about the wrangling that was going on behind closed doors between the two sides; they were kept waiting to cast their vote in case an agreement was reached. The mood among the lawmakers inside the US Capitol reflected the wintry conditions outside; like the weather the mood of the congressmen was cold, dark and uncompromising. With 36 hours before the US economy was threatened to suffer a half trillion dollars in tax hikes and spending cuts of US$ 600 billion in 2013, Senators shuttled between the chamber and their business lunches. Unable to agree on a path forward to avoid a gridlock that had been two years in the making, the negotiations between the Democrats and the Republicans went right down to the wire before a deal was clinched.
Divided nature of American politics: The crisis that was averted demonstrated the divided nature of American politics. It was not only the Republicans who hung obstinately to fiscal conservatism. Some of the Democrat politicians in the Senate and the House of Representatives also were committed to a conservative fiscal policy and voted against avoiding the fiscal cliff, irrespective of the apoplectic consequences. Political and economic ideology in the form of fiscal conservatism cut across the party divide.
But it was the Republicans who constituted the majority of the hardcore supporters of conservative fiscal policy. They are for a smaller federal government for which cutting fiscal deficits through giving fewer tax breaks and cutting taxes are seen as essential to realise the political goal. In the House of Representatives, where the Republicans control the chamber, critics complained that President Barack Obama had shown little interest in cutting government spending and was too concerned with raising taxes on the top two per cent, that is the rich Americans.
Calling the House of Representatives to act quickly after the Senate had arrived at a deal, President Obama was for an immediate follow-up action to approve the deal. He pointed out that while neither Democrats nor Republicans got everything they wanted, the deal was the right thing to do for the country. In a conciliatory tone he admitted that there was more work to do to reduce federal government's deficits and assured that he was willing to do his best in that respect. He was optimistic that following the deal the country could go forward and continue to reduce the budget deficits through a combination of new spending cuts and new revenues from the wealthiest Americans.
Everything not accomplished: The deal that has averted the 'fiscal cliff' has not accomplished everything that it was supposed to. The deal has postponed for two months sweeping spending cuts amounting to US$ 100 billion on military and domestic programmes. It extended unemployment insurance to 2.0 million Americans for only a year. The real gain of Obama administration was to make the Republicans agree to convert the alternative minimum tax permanent before it expired, thereby protecting the middle income Americans from being taxed as if they
The most glaring success, of course, was the agreement to hike tax for the rich, the much talked about 'two per cent'. The tax hike for the rich was not easy for the Republicans but they eventually voted to raise rates for the rich because the alternative would have meant tax increases for almost all working Americans, an outcome that would have made them highly unpopular. Under the deal households earning more than US$ 4,50,000 a year will be subjected to tax rise and the rate would be 39.6 per cent for the top income group. The deal exempts all lower income earners (those earning less than US$ 4,50,000) from tax rise that would have resulted from the failure to avoid the 'fiscal cliff'.
American lawmakers on the Capitol Hill took the nation to the brink, a situation that threatened to slide over the cliff, showing how dysfunctional has the US Congress become. The country's elected representatives have long been divided as hapless slackers but this year (1st January 2013) with a fiscal crisis of unprecedented nature the situation was different. The 112th Congress is being seen as the least effective in decades. President Barack Obama and the Republican House Speaker John Boehner hardly set an worthy example by pointing the finger of blame at one another as they explained away the lack of a deal.
The worry: What is more worrying is that the deal that has been hammered out merely sets up a larger showdown two months from now. Democrats can claim a political victory for having secured the first tax increase on the wealthy Americans in more than two decades, albeit at the higher threshold (US$ 450,000) than they had wanted (US$ 400,000). As regards the Republicans they can look forward to the looming brinkmanship over the sovereign debt ceiling which will constitute the next cliff. For this uncertainty the deal is likely to be unhelpful for growth prospects of the US economy. There is nothing in the state of the real US economy that can make one complacent about a rolling fiscal crisis. The persistent fog of uncertainty is not going to lift anytime soon. With another showdown between the two sides over debt ceiling coming in a few weeks, it is likely to thicken.
The deal has also put an end to the two per cent pay roll tax holiday which has helped keep the US economy growing in the past two years. It is possible that the deal will boost consumer confidence and spark a relief rally on Wall Street. But knowledge of the looming debt ceiling showdown will ensure that both are temporary.
The present debt ceiling at US$ 16.3 trillion will come up for upward revision in about two months' time. The Republicans will not give ground easily on this if their stand on the subject in 2011 is anything to go by. Moreover, they will seize the occasion to compensate for whatever concessions they have made over the fiscal cliff issue. The US economy, therefore, is not out of the woods and the Democrats will not have a respite from political brinkmanship.
During the fiscal cliff negotiation President Obama remained detached, more or less, as he was for most of the debt ceiling crisis in 2011. It is true that he has shown more flexibility than the Republicans in the talks but in terms of operating style he did not get personally involved. Instead of locking Congressional leaders in the White House day after day until they came up with a deal, Obama outsourced talks to the Senate and eventually to the Vice President, Joe Biden. For the next showdown President Obama has to be more assertive to ensure that another year is not frittered away on cliffs.
The most disappointing aspect of the fiscal cliff crisis was that it did not show Republican conversion to bi-partisanship. In contrast to the Democrats, the Republicans are led from the bottom, that is their constituency, which limits the ability of the Congressional leaders to take initiative on their own. Now that they have given away their pledge not to tax the rich, the grass-roots Republicans will demand from their leaders payback in the form of deep spending cuts. This is their favourite solution to the debt ceiling crisis.
The only silver lining is that the next showdown will offer Obama a chance to knock fiscal brinkmanship on the head for the remainder of the Congress. If he can accomplish that he may be able to pursue his priorities, including expanded social security, unemployment insurance, medicare and payroll tax relief for the middle class. He has already declared that the deal will enable him to redeem the pledge given at the time of last election for building a more equitable economic system.
Clash of ideology: The main problem facing America is clash of ideology and political partisanship. The Republicans do not want to give up their ideological commitment for a smaller government and therefore, is against tax rise, particularly on the rich. Their policy of a significant spending cut is in line with this goal.
On the political side, they want to show that President Obama has failed to fulfill his election promise. It is politics of election and ideology of a conservative fiscal management that bring the two parties on collision course time and again. The result is nail-biting brinkmanship that keeps the American and the global economy on tenterhooks. What the world expects from the superpower and the biggest economy is less drama and brinkmanship. America should be aware of its leadership role in the world and the obligation that it entails.