Still hope for avoiding the fiscal cliff

Washington, D.C.The United States is only three days away from going over the “fiscal cliff”, with all damage could do to confidence in the country’s capacity to manage its basic affairs, and the Washington’s leaders “still have not agreed” on even a stopgap measure to avoid the worst consequences of not reaching agreement. But there is a clear way to avert them. Congressional leaders and President Obama conferred at the White House on Friday afternoon, first such meeting in 6 weeks. Instead of offering something new, however, Mr. Obama reportedly reiterated his position that Bush tax cuts on household income above $250,000 should lapse on Jan. 1. Republicans wanted more from the president. But after meeting, Senate Majority Leader Harry Reid (D-Nev.) and his GOP counterpart, Sen. Mitch McConnell (Ky.), said they had agreed to attempt to hash out a deal over the weekend enough Republicans can accept. The task these leaders face is no longer crafting a big restructuring of federal taxing and spending. There isn’t enough time for that between now and end of the year. The goal now, then, is the “bare minimum,” as Obama said Friday evening, merely to stave off a self-inflicted economic shock. It’s clear what such a stopgap must include. The first element is a rise in income tax rates for wealthy Americans. The sting to Republicans might be lessened by an agreement on the estate tax, which is also scheduled to jump Tuesday. But all the focus on tax rates leaves out much else Congress must address. Lawmakers have essential housekeeping that they must see to before end of the year, such as preventing huge cut in Medicare payments to doctors + extending unemployment insurance. The alternative minimum tax (AMT), a scheme intended to ensure that the rich pay income tax, must also be patched. Unless Congress acts to stop it, AMT will dig deep into the middle class. Delaying a patch until after Jan. 1 could wreak havoc on federal tax collection, affecting perhaps 100 million 2012 tax returns, according to the Internal Revenue Service. Congress must also deal with “sequester,” about $100 bill. in ill-targeted and unwise spending cuts, including to the Pentagon, that will phase in beginning in January. Though destructive measures such as furloughs and layoffs could be put off for a time, if the cuts were allowed to kick in, they would still have immediate bite. Republicans might resist canceling or delaying the sequester without offsetting spending cuts elsewhere. But preventing the across-the-board reductions is nevertheless critical. It is pathetic political leaders have not already agreed to avoid worst effects of the fiscal cliff. But, with McConnell and Reid talking, with the House returning this weekend and with House Speaker Boehner (R-Ohio) promising his chamber will consider any bill Senate sends it, there is still time. Mr. Obama said that if there is no agreement, he would demand an up-or-down vote on his own proposal by both houses. That should be a last resort; and better for Democrats to seek a bipartisan deal. (source: Editorial Board – The Washington Post – 29/12/2012) 


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18 Responses to Still hope for avoiding the fiscal cliff

  1. Professor Uziel Nogueira says: For decades, the American people got what they wanted from the political system. That is, a welfare state and the largest and costly military in the world. That occurred while the economy lost competitiveness in the global markets and taxes were lowered across the board, particularly for the wealthy 1% of society. This is how the US society lived the imaginary American Dream until the Wall Street debacle of 2008.

    Any challenge faced by society was resolved by the political system with more public spending and more debt.

    Even the costly wars on terror are being financed by money from foreign lenders. However, the days of free ride due to the dollar dominance in the world markets are coming to and end. The day or reckoning has come via a stalemate in the political system. The so called fiscal cliff 2012 reflects an obvious fact for any foreigner political observer. Important segments of the US elite, particularly among the GOP, have realized that either the country deals (seriously) with a public spending out of control or give up the title of most powerful military in the world in a few years.

    The question is: When the political process in Washington is over, who is going to win? guns (financial-industrial-intelligence/military complex) or butter (the welfare state)? One thing for sure. The days of guns and butter prevalent since the Vietnam war are definitely over. Difficult political choices and austerity will dominate the US scenario from now on.

  2. President Barack Obama has pressed the House of Representatives to vote in favour of a Senate-backed deal that would avert the swingeing cuts and soaring tax rates of America’s so-called “fiscal cliff”. The country officially passed its deadline for an agreement on new budget legislation at midnight on New Year’s Eve, but after Vice President Joe Biden and Republican Senate minority leader Mitch McConnell brokered a last-minute agreement, the Senate approved it overwhelmingly at 2am this morning, by 89 votes to eight. In a statement, Mr Obama said, “While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay.” The House convened at midday, and theoretically has until the end of tomorrow to vote on the measures before the new Congress elected in November takes office, but the bill’s passage is not guaranteed. Republican House Speaker John Boehner has yet to endorse the deal, and many of his GOP colleagues are expected to oppose it. The compromise reached by the Senate would see tax rates rise for individuals earning more than $400,000 per year, and families earning more than $450,000 per year – a defeat for Republicans, but higher than the $250,000 threshold originally demanded by Democrats including the President. It is the first time Republicans have approved a rise in income tax for two decades, since President George W Bush famously broke his “Read my lips” campaign promise. The new deal also raises the Estate Tax on inheritances to 40 per cent for estates worth more than $5m. The spending cuts threatened by the fiscal cliff have been postponed for two months. Mr Obama claimed in his statement that the agreement “protects 98 per cent of Americans and 97 per cent of small business owners from a middle class tax hike.” However, the deal does spell the end of the payroll tax holiday, which means that taxes on 160 million Americans, many of them middle class or poor, will indeed rise: by two per cent, from 4.2 per cent to 6.2 per cent. The deal came together after days of frantic back office negotiations at the Capitol (…..)

  3. The “fiscal cliff” was designed by Washington for Washington — it was intended to set up a scenario so severe that the president and Congress would, at last, have to take on the nation’s major tax and spending problems. Instead, lawmakers again found a way to sidestep many of the prickliest issues and in the process set up other, potentially more severe, showdowns in the new year (…..)

    Many Republicans believe they’ll have more leverage then than they do now because the debate over tax rates on the wealthy will be settled.

    In their view, Obama has been wielding a powerful rhetorical weapon: that Congressional Republicans were blocking a deficit-reduction deal and preventing tax cuts for the middle class because they refused to allow taxes to rise for the wealthy. But the deal reached late Monday, which allows rates to rise for individuals making more than $400,000 a year and couples earning more than $450,000, would remove the issue from discussion. Republicans figure that will tilt the debate toward spending cuts. Graham said he anticipates forcing Democrats to give in on a long list of the GOP’s top spending priorities in the new year: raising the eligibility age for Medicare, increasing premiums for its wealthier beneficiaries, and trimming Social Security benefits by using a new method to calculate inflation. “I think if we insist on changes like that, we’ll get them,” he said. That is, if Democrats even agree to bargain. Obama has insisted he will not get drawn into another negotiation over the debt ceiling like the one that resulted in the nation’s first bond downgrade and damaged consumer confidence in 2011. That fight also left him politically bruised. “I want to send a very clear message to people here. We are not going to play that game next year,” Obama told business leaders last month. Obama also made clear in a White House appearance Monday that he thinks all future deals should raise additional tax money from the wealthy, as well as cut spending. “We’ve got to do this in a balanced and responsible way,” he said. “And if we’re serious about deficit reduction and debt reduction, then it’s going to have to be a matter of shared sacrifice. At least as long as I’m president.” This outcome was neither side’s first choice. Obama wanted to take care of raising the debt ceiling as part of the fiscal-cliff solution. “It should be part of the deal,” White House press secretary Jay Carney said on Dec 4. “It should be done, and it should be done without drama.” But it wasn’t (…..)

    Obama resigned himself Monday to the reality that a “grand bargain” with Republicans would not happen all at once. “It may be we can do it in stages,” he said Monday of the major deficit-reduction plan he had once hoped to reach with Republicans by the end of the year. “We’re going to solve this problem instead in several steps.”

  4. (…..) Monday marked the third time in two years that a congressional cliffhanger had ended with a bargain struck by McConnell and Biden. The first time came in late 2010, during a year-end showdown over the expiring Bush-era tax cuts. The second was in August 2011, during the fight over the debt ceiling. In both cases, Washington’s new power players — Obama and the tea-party-infused House GOP — couldn’t reach an agreement. They were saved by a bargain struck in Washington’s oldest tradition, not much changed from the days of Henry Clay except the size of the dollar figures and the presence of a phone. Two men, both with 20-plus years in the capital, working out the final touches alone. “Happy new year!” Biden said to awaiting reporters, as he swept in to brief Democratic senators on the deal, around 9 p.m. “Don’t you enjoy being here New Year’s Eve?” (…..)

  5. Stocks were driven sharply higher on the last day of the year by signs that a resolution to the fiscal negotiations in Washington could come within days (…..) The government was expected to go over the so-called fiscal cliff on Monday night, when a package of tax increases and spending cuts was set to start being phased in. But the political signals out of Washington convinced many investors that the White House and Congress would avert the changes that would be most damaging to the economy. “By day’s end, the assumption was that a deal was in hand — minor details needed to be worked out, but a finished product would be in the books within the next few days,” said Daniel Greenhaus, chief global strategist at BTIG. “Investors that had spent the last couple of days trading down reversed that trend and took things higher.” Late Monday evening, a tentative deal was reached that would raise taxes on incomes above $400,000. The market’s jump, much of which occurred after an early-afternoon news conference by President Obama, brought an unexpected end to a day that began with continuing bickering in Washington and a sense of foreboding on Wall Street. Stocks had fallen steadily for most of the last week and opened the day trading down. Senator Mitch McConnell of Kentucky, the leader of the Republican minority, said late in the day that an agreement was “very, very close.” Stocks could easily lose their gains if either chamber of Congress is unable to pass the compromise that was being negotiated on Monday. Senators said they were hoping to agree upon legislation and pass it along to the House for a vote on Tuesday. Some details of the agreement were still unclear, and the Republican-controlled House could demand changes. The stock markets are closed on Tuesday, and most traders will be back at their desk Wednesday morning after a week of vacations and light trading. Even if there is an agreement, it is unlikely to resolve a separate debate over the limit on the amount the government can borrow. The government hit its self-imposed debt ceiling on Monday, and Treasury Department officials have said they will be able to finance the budget for only a few weeks using emergency measures (…..)

  6. EIGHTY YEARS AGO on New Year’s Day, the country was anxiously waiting for the other shoe to drop. A crushing economic depression showed no sign of abating. Americans had elected a new president in November but had to wait until early March of 1933 to see what he would, or could, do about it. When Inauguration Day finally came, the new chief got quickly to the point. He proclaimed his “firm belief that the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” The words are old now, somewhat tired from repetition, and they weren’t entirely true when spoken. There was a lot more to be feared than fear itself: drought, disease, hunger, economic failure, Hitler. But Franklin D. Roosevelt, in addition to lifting the country’s spirits, had hit on an important point about the American character in that inaugural address, one that was essential to recovery. It was the idea that fear, the sort of paralytic, debilitating fear he had in mind, discourages people from action and dims their hopes. It strikes not only at the economy but at America’s most essential quality: its basic and enduring optimism. If there is truly an American “exceptionalism,” it’s less likely to be found in concepts of limited government and divided powers than in the belief of the people, from the very first days, that things can always be made better. It was the refusal to acquiesce in fatalism and resign oneself to acceptance that created the New World and that has kept this republic going for well over two centuries.

    Today FDR’s words may be more true than they were 80 years ago, when the country did face truly catastrophic conditions. Our problems as the new year begins are not insuperable; they are manageable but greatly exacerbated by fear, much of it created and nurtured by people who make a good living off it. Whether it is the fear that one’s pension will be cut, guns restricted, income taxed too heavily or medical care infringed, it is often exaggerated and dishonest. There are difficult questions to be dealt with in every matter involving economic progress and the best distribution of public resources, but they can be answered by rational and well-informed discussion. Fear, unreasoning, unjustified fear, has no useful place in it, then or now.

    (source: Editorial Board – The Washington Post – 01/01/2013)

  7. On Nov. 11, a mere five days after the presidential election, the cruise ship Nieuw Amsterdam pushed off from Fort Lauderdale for a Caribbean jaunt. Aboard were nearly 600 emotionally tattered Republicans, most of whom had been expecting a Republican victory of Rovian proportions — surely they had all read Karl’s prediction in the Wall Street Journal — and now were about to cruise 750 miles to nowhere, just like the party they so adored. The Nieuw Amsterdam was 86,000 tons of painful metaphor. The cruise was sponsored by National Review, the magazine founded by William F. Buckley and for years the most important and probably the most readable journal in all of American conservatism. As with other such magazines — the Nation, a liberal journal, does the same thing — a group of columnists and other well-known movement types get piped aboard so that along with the flambeed everything comes a dessert of political instruction, faux insider stuff and the usual warnings that civilization (as we know it) is coming to an end. The difference between this cruise and others like it was the (paying) presence of Joe Hagan, a writer for New York magazine. To his considerable credit, Hagan abstained from shooting these particular fish in their barrel and instead portrayed them as dismayed and somewhat disoriented refugees from an America that used to be. Not only had they been unprepared for Mitt Romney’s loss, but it was dawning on them that their tribe — mostly affluent, elder whites — had lost the election as well as the demographic battle that had preceded it. “Minorities came out like crazy,” Kevin Hassett, a former Romney economic adviser, told them. “White people didn’t get to the polls. There are far more African-Americans voting than they expected.” Imagine!

    (…..) These passengers were people who had — and maybe still have — a sense of possession about America. It was once theirs. It once looked like them and acted like them and thought like them. No more. In more ways than one, they were out to sea.

  8. It is more than a decade since the US last ran a budget surplus – and as negotiations to avoid America’s fiscal cliff sailed past their new year deadline on Tuesday, it seems the country will have to wait another 10 years before it happens again. Bill Clinton was the last president to oversee a budget that prevented the country falling further into debt. The task may be beyond Hillary Clinton or whoever takes over the White House after Barack Obama departs in 2016 (…..) Going over the fiscal cliff, which is another way of saying that the US would have allowed tax rises and spending cuts equivalent to more than 4% of GDP over the next year, would be a disaster.

    The markets never believed it would happen, but they are equally sceptical that the long-term issues will be resolved.

  9. Americans can rarely have held their politicians in greater contempt, and rightly so. The agreement that pulls the country back from the brink of the so-called “fiscal cliff” is no more than a feeble, last-ditch palliative. And even that assumes the House of Representatives will follow the Senate in a bipartisan vote to ratify the deal (which at the time of writing looked less likely than ever.)

    Some observers have glibly asserted that the stalemate is precisely what the country’s founding fathers envisaged, with the constitution’s elaborate system of checks and balances. But Messrs Washington, Jefferson, Madison and the rest could never have imagined so colossal a collective abdication of responsibility by the people’s elected representatives.

    All parties to the mess must share in the blame: Republican right-wing zealots with their blind resistance to tax increases of any nature, the ineptitude of the House Speaker John Boehner, who lost control of his Republican troops, and the liberal Democrats who will have no truck with changes in the costly entitlement programmes, Medicare and Social Security, that are essential if the country’s finances are to be put on a stable long-term footing. Nor can the President himself escape criticism. Barack Obama, whose failure to establish good personal relationships with key Republicans has contributed to the deadlock, has too often seemed disdainful not only of the recalcitrant House, but of the entire legislative process. In the event, it fell to the unlikely tandem of Vice-President Joe Biden and Mitch McConnell, the waspish leader of the Republican minority in the Senate, to thrash out a bargain.

    And as was predictable from the outset, the deal merely kicks the can down the road.

    Vanished is any prospect of the permanent “grand bargain” of tax increases, spending cuts and entitlement reform that the President, economists, t bipartisan commissions and Congressional supercommittees have urged. Even if it passes the House, the agreement will only raise some $600bn (£370bn) of new revenue, a fraction of what is required. In the meantime, a veritable mountain range of fiscal cliffs looms in the next few weeks. Unaddressed by the Biden-McConnell bargain are the mandatory $100bn of spending cuts that were supposed to take effect from the start of 2013. Instead these have simply been deferred. And even before that comes a potential clash over raising the federal debt ceiling, that could be even more ruinous than the one that brought the country to the brink of default in summer 2011. Finally, on 27 March a short-term budget funding measure expires – bringing the risk of a federal government shutdown. And next time Republicans could hold the stronger hand. The argument over tax cuts for the wealthy is now off the table. Their goal will be to make spending cuts and entitlement reforms the price of agreement to raise the debt ceiling, an argument to which Americans are more receptive.

    Mr Obama insists he will not yield on the debt ceiling. But he did so 18 months ago, and some Republicans are betting he will fold again, rather than see the country default on its debt. Such brinkmanship not only risks plunging the global financial system into the abyss. It also underlines what has long been obvious: that the greatest enemy of American growth is the dysfunctional American political system.

  10. Michael Bennet was supposed to be going off a cliff in Vail. But instead of his usual New Year’s trip to a ski lodge with his wife and three daughters, the junior senator from Colorado found himself in a strange, unfamiliar place in the middle of the night: breaking with the president and his party to become one of only three Democratic senators and eight senators total to vote against President Obama’s fiscal deal. “I was a little surprised that the margin of the vote was so big,” said a weary Senator Bennet, who seemed a bit taken aback to be such an outlier. He was munching on a late-afternoon cheese steak sandwich at “George’s, King of Falafel and Cheese Steaks.” (The senator loves falafel, which his girls call “feel awful.”) “I almost ordered extra cheese,” he said sheepishly, “but I would have been embarrassed.” Long before Bennet came to work in the “land of flickering lights,” as he mockingly calls the dysfunctional nation’s capital where he grew up, Frank Capra dreamed him up. In a Congress that has become opéra bouffe, Bennet is the freckled blond choir boy singing a cappella (…..) He thinks the trouble is not so much a clash of Democratic and Republican orthodoxies as it is a clash of past and future. “I think the inhabitants of the past are fighting hard to keep the rents they acquired in the 20th century,” he said. I noted that his wife said that his special skill is knowing the difference between worthy challenges and impossible ones. He laughed, then mused: “This may be one of the impossible ones. But we have to do it. I know this country is not going to allow itself to go bankrupt. It’s challenging, though, because in this town there are all kinds of people whose job it is to obfuscate the facts.” Then the exhausted senator left to see “Skyfall.” The one with James Bond, not John Boehner.

  11. Professor Uziel Nogueira says: Senator Michael Bennet gives a precise definition of the US political system in times of fiscal cliff and tough policy choices:

    “Washington politics no longer follows the example of our parents and our grandparents who saw as their first job creating more opportunity, not less, for the people who came after…But the political debate now is a zero-sum game that creates more problems than solutions”.

    From a political economy standpoint, two conclusions can be derived from the zero-sum game mentioned above. First, the inter-generational conflict of young versus old has exploded and gained momentum in the Congress. Keeping or reducing social benefits for baby boomers is the main battle front of this political conflict. Second, baby boomers will lose the political battle in DC, eventually. The main reason is that public debt can no longer be financed in a sustainable way. Spending cuts are inevitable and Congress has to choose between social and defense spending cuts. The latter always wins in DC. Baby boomers are already paying a price for a public sector finances out of control.

    The Fed’s policy of low (negative) interest rates is hard hitting savings from middle class retirees.

    Finally, the dominant role of the US dollar in the world economy is coming to an end. Really bad for retirees, like myself, on a dollar pension. The golden era of a strong — in the dollar we trust — is over. This means high rates of inflation in the US in the near future.

  12. Ending a climactic fiscal showdown in the final hours of the 112th Congress, the House late Tuesday passed and sent to President Obama legislation to avert big income tax increases on most Americans and prevent large cuts in spending for the Pentagon and other government programs. The measure, brought to the House floor less than 24 hours after its passage in the Senate, was approved 257 to 167, with 85 Republicans joining 172 Democrats in voting to allow income taxes to rise for the first time in two decades, in this case for the highest-earning Americans. Voting no were 151 Republicans and 16 Democrats. The bill was expected to be signed quickly by Mr. Obama, who won re-election on a promise to increase taxes on the wealthy. Mr. Obama strode into the White House briefing room shortly after the vote, less to hail the end of the fiscal crisis than to lay out a marker for the next one. “The one thing that I think, hopefully, the new year will focus on,” he said, “is seeing if we can put a package like this together with a little bit less drama, a little less brinkmanship, and not scare the heck out of folks quite as much.” In approving the measure after days of legislative intrigue, Congress concluded its final and most pitched fight over fiscal policy, the culmination of two years of battles over taxes, the federal debt, spending and what to do to slow the growth in popular social programs like Medicare. The decision by Republican leaders to allow the vote came despite widespread scorn among House Republicans for the bill, passed overwhelmingly by the Senate in the early hours of New Year’s Day. They were unhappy that it did not include significant spending cuts in health and other social programs, which they say are essential to any long-term solution to the nation’s debt. Democrats, while hardly placated by the compromise, celebrated Mr. Obama’s nominal victory in his final showdown with House Republicans in the 112th Congress, who began their term emboldened by scores of new, conservative members whose reach to the right ultimately tipped them over. “The American people are the real winners tonight,” Representative Bill Pascrell Jr., Democrat of New Jersey, said on the House floor, “not anyone who navigates these halls” (…..)

  13. Professor Uziel Nogueira says: CAN THE FINANCIAL MARKETS “DISCIPLINE” THE US CONGRESS ?? Let’s face it. The Onion was wrong when it proclaimed that Obama (in his first election) had won the worst job in America. Nowadays, being a Congressmen/Senator is THE worst job in America ! US politicians have a true mission impossible. On one hand, American voters are against any tax increase, period. On the other hand, voters do not accept any reduction in social and military spending when the federal debt has reached 85% of GDP.

    The system has reached a break point. Business as usual approach is no longer an option for a confused and afraid Congress.

    The solution for the current mess is even more complicated. The US political system is not designed to deal with the (complex) problems mentioned above. Politicians are elected to defend or expand benefits acquired by their constituency, not to reduce or eliminate them. In the decision making process of any elected politician, the group interest always prevails over the general welfare of the nation. The system worked reasonably well during times of prosperity and/or short term economic downturns.

    This time is different. The current economic-financial crisis is systemic, with no short term solutions. Eventually, the problem will be solved by the financial markets. Sooner or later, the US debt will suffer another downgrade by the rating agencies. Interest rates will go up. Luckily, there won’t be a sudden stop of financial flows. The world is awash with TRILLIONS of dollars without any option but to buy US debt.

  14. Stalling of Storm Aid Makes Northeast Republicans Furious

    – Governor Christie: Natural Disasters Don’t Happen In Red States Or Blue States

  15. The centrist fantasy of a Grand Bargain on the budget never had a chance. Even if some kind of bargain had supposedly been reached, key players would soon have reneged on the deal — probably the next time a Republican occupied the White House. For the reality is that our two major political parties are engaged in a fierce struggle over the future shape of American society. Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy. Yes, it’s essentially a class war. The fight over the fiscal cliff was just one battle in that war. It ended, arguably, in a tactical victory for Democrats. The question is whether it was a Pyrrhic victory that set the stage for a larger defeat (…..) According to the normal rules of politics, Republicans should have very little bargaining power at this point. With Democrats holding the White House and the Senate, the G.O.P. can’t pass legislation; and since the biggest progressive policy priority of recent years, health reform, is already law, Republicans wouldn’t seem to have many bargaining chips. But the G.O.P. retains the power to destroy, in particular by refusing to raise the debt limit — which could cause a financial crisis. And Republicans have made it clear that they plan to use their destructive power to extract major policy concessions. Now, the president has said that he won’t negotiate on that basis, and rightly so. Threatening to hurt tens of millions of innocent victims unless you get your way — which is what the G.O.P. strategy boils down to — shouldn’t be treated as a legitimate political tactic. But will Mr. Obama stick to his anti-blackmail position as the moment of truth approaches? He blinked during the 2011 debt limit confrontation. And the last few days of the fiscal cliff negotiations were also marked by a clear unwillingness on his part to let the deadline expire. Since the consequences of a missed deadline on the debt limit would potentially be much worse, this bodes ill for administration resolve in the clinch. So, as I said, in a tactical sense the fiscal cliff ended in a modest victory for the White House. But that victory could all too easily turn into defeat in just a few weeks.

  16. (…..) Perhaps some Republicans will threaten to keep the country from paying its bills to accomplish something they don’t otherwise have the votes to accomplish. But if the European precedent holds, the final result will at least avert disaster. Whether more than that can be hoped for may depend in part on whether those screaming for major cuts in federal spending actually believe their rhetoric — the talk about the United States becoming another Greece.

    The reality is that the current budget deficit largely reflects two things: exceptionally low government revenue and the continuing problems caused by the financial crisis and recession that followed the bursting of the housing bubble.

    Bringing tax revenue back to historical levels, as well as the growth in revenue and reductions in spending that will automatically follow an improving economy, will make a major difference. There are issues that must be addressed regarding health care costs and Medicare, as well as the fact that there will be fewer workers for each retiree as the baby boomers retire. But those who see a Greek-type crisis here should ask themselves why the government can borrow at interest rates that remain extraordinarily low. The world’s trust in Uncle Sam’s ability to pay its debts has remained high.

    What are not high are taxes, although a poll would no doubt show that many people think otherwise.

    Federal taxes, relative to the size of the economy, are significantly lower than they were after Ronald Reagan cut them. During 2012 federal revenue amounted to around 17 percent of gross domestic product. At the Reagan low point, the figure was a full percentage point higher. In 2009, when the deficit was ballooning, the figure fell below 16 percent, something that had happened only once during the more than 60 years for which comparable data is available (…..)

  17. (…..) The reality is that America is yet to wake up to the full extent of its fiscal nightmare. Even the typical Republican voter is not – being on average older and poorer than a Democrat voter – in favour of gutting the welfare state. Tea Party extremists are more noise than signal. That is why the plans of Mitt Romney and Paul Ryan, the Republicans’ losing presidential ticket, postponed all the tough spending cuts on Social Security and Medicare by a decade. Neither Democrats nor Republicans recognise that maintaining a basic welfare state, which is right and necessary in our age of globalisation, rapid technological change and demographic pressure, implies higher taxes for the middle class as well as for the rich. A deal that extends unsustainable tax cuts for 98 per cent of Americans is therefore a pyrrhic victory for Mr Obama.

    For now, he is being helped by the quiescent financial markets. It will probably take years for the US to confront the reality of its fiscal position and raise revenues to a level sufficient to fund a reformed – but not gutted – welfare state. Large fiscal deficits will remain the norm for the next few years, at least so long as the bond market remains quiet, as I believe it will.

    Bond market “vigilantes” have no appetite for destruction. Why should they? Growth is low and inflation lower; the US still has the global reserve currency; US Treasuries remain haven assets; interest rates are at zero; the US Federal Reserve is committed to QE; and China and other emerging economies will keep accruing US dollars to resist appreciations in their own currencies. All this guarantees the cheap financing of the US deficit for years to come. But eventually, the vigilantes will wake up. In short, the “mini deal” on the fiscal cliff dodged all the important questions. By not including spending cuts in the deal, the Democrats have emboldened Republicans who are determined to slash taxes but lack a plan to pay for it.

    It is again up to Washington’s policy makers to fix the problem before the market does it for them. Tuesday’s deal suggests this will not happen with any ease.

  18. Governance in the United States is at a standoff. The crisis over the federal budget has led many people around the world to wonder if Americans haven’t lost their minds. Ultimately, as Winston Churchill infamously observed, they may be counted on to do the right thing after exhausting all other options. But this hardly is sound policy with every new vote in Congress.

    Maybe the latest crisis is symptomatic of a deeper and even more serious problem.

    The future of the United States – and the American experiment – seems bleak. The optimism for which Americans are known comes less readily. While pessimism is nothing unique in American history – widespread since the time of the Puritans – its prevalence today is spread by the realization that the country’s position of global superpower may soon be lost. This realization, regarded as a “post-hegemonic” fact, is no longer controversial. All empires vanish eventually. Hegemony indeed may be a form of imperial rule – it’s been called an empire with good manners – but that’s beside the point. American hegemony may be giving way to some other post-hegemonic condition. It is hard to say where it will lead, or what it signifies. “After forty, all life is a matter of saving face,” Thomas Heise has written. “For those whose successes have run out early, the years are measured less by the decreasing increments of honors achieved, than by the humiliations staved off and the reversals slowed.” This diagnosis for America itself, increasingly difficult to refute, raises the simple question: Will life go on as before, only with less ostensible concern for the rest of the world, or more? Some may say this would make the US a more “normal” nation. Normality resides in the eye of the beholder. Each nation is as normal or as abnormal as its people and observers imagine it to be. Many Americans still regard superpower status as being normal, however unpopular the burdens of global leadership are at times. The power of the US dollar, visa-free travel throughout much of the world and the global prevalence of English are still widely taken for granted, despite the country’s difficulties.

    Yet this moment may represent a major psychological, even metaphysical, shift in the way that Americans relate to the rest of the world. To understand the change we must begin with perceptions (…..)


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