Yesterday our research team comprising of Adam Halantas (Research Analyst) and Chris Conway (Head of Research) started the debate on whether we are heading over the fiscal cliff. Today Chris presents his thoughts on why in his opinion we are heading over the cliff.
WHY WE ARE GOING OVER THE FISCAL CLIFF – Chris Conway
TOO FAR APART
The main reason why I think we’re going over the fiscal cliff is because the sides presently remain too far apart and have thus far made little progress in closing the gap;
Obama sent Treasury Secretary Timothy Geithner to Capitol Hill proposing $US1.6 trillion ($A1.53 trillion) in new tax revenues over the next decade, mainly from higher tax rates on the wealthiest two per cent of Americans.
A Republican counter-offer included a plan for $US800 billion in tax revenue raised through closing loopholes and ending some deductions.
Sorry guys but an $800 billion wide gap is no small thing and comments from both Boehner and Obama following a meeting at the weekend have done little to suggest the gap is narrowing.
I could write 5000 words here outlining the nuances of political wrangling in the US but the simplest way to say it is this; both Obama and Boehner and the Democrats and Republicans they represent have either too much to lose or not enough to gain by budging from their respective positions and, as such, won’t.
To put that into context let’s consider the following;
– Some Democrats are willing to let the deadline pass because they believe a rash of broad-based tax hikes would pressure Republicans to give more ground in renewed deficit-reduction negotiations. So they feel their negotiating position will be enhanced due to the increased financial pressure on the Republicans’ most powerful constituents – the rich.
– Some Republicans also feel that it is best to let the deadline pass because there is no major concession that they can extract in negotiations. They know that taxes for the rich are going up if they do or don’t get a deal done, and that is the main thing they are fighting against. So unless there is some political pay dirt to be had, which at present there does not appear to be, they’re not inclined to negotiate in earnest.
So, here we have factions within both parties not overly concerned with the country going over the fiscal cliff. The Democrats because they want to use it as a pressure tactic and the Republicans because they don’t have enough to gain by coming to the party.
Both of these positions are borne out of political posturing and how many pounds of flesh can be extracted from the other side by whatever means necessary – to hell with the economy and the American people if it serves political interests.
That doesn’t sound like a good place from which to start negotiating and with these types of people entrenched on both sides of the divide, I just can’t see a deal getting done.
One of the major factors as to why I think we’re going over the fiscal cliff lies not in the adversarial nature of the politicians trying to reach agreement, but rather the process by which they must get ANY deal done. It is not simply a matter of President Obama and House Speaker Boehner agreeing and shaking hands.
What we’re talking about here is a piece of complex, bipartisan legislation that goes directly to the heart of the US economy – it will cover taxes, social-safety-net spending and the federal debt limit.
The end result will likely be a complicated bill that will have direct consequences for average Americans and, as such, will likely be fiercely debated.
At this point in the process, it is becoming increasingly unlikely that there will enough time to turn a framework into enactable legislation and then get it passed.
For senators to responsibly vote on a big, bold framework or package, they need time to review, debate and discuss. They are rapidly running out of that time.
EVEN IF WE DO GO OVER, IT WON’T BE AS BAD AS EVERYONE IS MAKING OUT
If the cliff is breached, US taxes will revert to the levels collected under the Clinton regime and will yield $500 billion more taxes next year.
Defence and Medicare will each have $100 billion sliced off their allotments. That $700 billion represents an economic contraction of roughly 4.7% over the year, enough to put the already sluggish US economy back into a recession. After the initial hysteria and political blame game subsides, it could be argued that markets will react favourably to this.
Sure, nobody likes tax increases but they would return to tax levels that still remain among the lowest in the developed world and were in place when the greatest economic expansion in history took place.
THE U.S. ACTUALLY MUST GO OVER THE CLIFF FOR ITS OWN GOOD
Some have legitimately argued that the US has long been writing cheques with its mouth that its wallet can’t cash and now it’s time to pay the piper.
Let’s not forget that the magnitude of the tax-breaks we’re talking about – $500 billion a year – is the size of the Swedish economy. This means that the richest half of Americans have been spared trillions of dollars in taxes since George Bush handed them these gifts.
Furthermore, this half a trillion in taxes per year returns Americans’ tax rates to levels that are still considerably lower than that paid by Canadians or Europeans.
This $500-billion giveaway means that Bush’s tax cuts represent the biggest entitlement anywhere by any nation in history to the very people who need it the least.