By David Böcking
The US has more in common with
heavily indebted southern European countries than it might like to admit. And
if the country doesn't reach agreement on deficit reduction measures soon, the
similarities could become impossible to ignore. The fiscal cliff looms in the
near future, and it’s not just the US that is under threat.
The US has finally voted and the dark visions of
America's future broadcast on television screens across the country -- and most
intensively in battleground states -- have come to an end. Supporters of both
Barack Obama and Mitt Romney had developed doomsday scenarios for what would
happen if their candidate's opponent were to win. Four more years of Obama, the ads warned, would result
in pure socialism. A Romney presidency would see the middle and lower classes
brutally exploited.
But following Obama's re-election, Americans are now facing a
different, much more real horror scenario: In just a few weeks time, thousands
of children could be denied vaccinations, federally funded school programs
could screech to a halt, adults may be forced to forego HIV tests and
subsidized housing vouchers would dry up. Even the work of air-traffic controllers,
the FBI, border officials and the military could be drastically curtailed.
That and more is looming just
over the horizon according to the White House if the country is allowed to
plunge off the "fiscal cliff" at the beginning of next year. Coined
by Federal Reserve head Ben Bernanke, it refers to the vast array of cuts and
tax increases which will automatically go into effect if Republicans and
Democrats can't agree on measures to slash the US budget deficit.
In total, the cuts add up to
$1.2 trillion over the next nine years, with half coming from the military and
half from other government programs, and with $65 billion coming in the first
year alone. They were enshrined in law with the Budget Control Act of 2011,
which also increased the debt ceiling. And though a deadline of Jan. 2, 2013
was set, they were never meant to come into effect. The plan for deep
across-the-board cuts was intended as a way to prod Democrats and Republicans
into reaching agreement on a long-term plan to reduce America's vast budget
deficit.
Not a Bad Thing?
The "fiscal cliff"
also includes the expiration of tax cuts for the rich, which were originally
passed by President George W. Bush and extended by Obama. The elimination of
the lower tax rates would, according to the Congressional Budget Office, result
in $221 billion in extra tax revenues in 2013 alone. A temporary 2-percent
federal income tax cut would also expire, resulting in an additional $95
billion flowing into government coffers next year.
There are also several other
cuts and tax hikes included in the austerity package. Some $18 billion in taxes
would come due as part of Obama's health care reform, and welfare cuts would
save $26 billion. Should lawmakers not reach agreement prior to the end of the
year, the US budget deficit for 2013 would be cut almost in half, to $560
billion.
Which doesn't sound like a bad
thing. After all, the US is staggering under a monumental pile of debt and
could potentially begin to face the kinds of difficulties that have plunged
several euro-zone countries into crisis. It is a viewpoint shared by the
ratings agencies -- a year ago, Standard & Poor's withdrew America's top
rating, justifying the measure by pointing to the unending battle over the debt
ceiling. The agency noted that "the political brinksmanship of recent
months highlights what we see as America's governance and policymaking becoming
less stable, less effective, and less predictable than what we previously
believed."
From afar, it is difficult to
argue; the ongoing battle between Democrats and Republicans in the face of a
horrendously imbalanced budget looks catastrophically absurd. As their country
heads toward the edge of the abyss, lawmakers preferred to debate whether or
not French fries and pizza should be considered vegetables.
Still, a significant element
in the dispute is a fundamental conflict that won't sound foreign to Europeans:
How much austerity is too much?
Plunging Growth
As good as an instantaneous
halving of the budget deficit might sound, the landing after a plunge off the
fiscal cliff would be a hard one. Were taxes to be ratcheted up at the same
time as state programs were slashed, it would have an enormous effect on the
economy. According to the Congressional Budget Office, 2013 growth would
immediately drop by four percentage points, making a recession unavoidable. The
number of unemployed would be two million higher than without the cuts.
It is an eventuality that
doesn't just put fear into the hearts of Americans. In its annual report on the
US, the International Monetary Fund (IMF) referred to the fiscal cliff as the
largest risk currently facing America. Investors have already reportedly become
more cautious in the face of the looming cuts. Should politicians not agree to
a credible plan for reducing US debt, it could ultimately harm the credibility
of the dollar as a reserve currency. More immediately, the IMF writes in its
World Economic Outlook report published in October, the drastic cuts
"would inflict large spillovers on major US trading partners." In
other words, an already fragile Europe would become even weaker.
As such, Germany won't be the
only country watching closely as US Congress struggles to reach an agreement in
coming weeks. Should the US economy radically slow down next year, "it
could in the current atmosphere of uncertainty result in a global loss of
confidence that would lead to a collapse in investment worldwide,"
according to the annual report of top German economic advisors released on
Wednesday. Nevertheless, the experts warn, simply postponing measures to
address the debt and budget deficit problems "would also have long-term
costs in the form of still higher sovereign debt."
The Greek Model?
What, then, is the solution?
In the end, the US could arrive at a compromise similar to the one that appears
to be forming for Greece: austerity measures combined with more time to achieve
budget deficit reduction targets. The drastic cuts currently looming are
essentially a kind of debt brake, but it is one with no flexibility built in
whatsoever. The US economist Denis Flower proposed in an interview with SPIEGEL
ONLINE that Washington should introduce a law mandating long-term debt
reduction, but which allows higher deficits in times of crisis.
US politicians, no doubt,
would not be fond of hearing their country compared to Greece. After all, the
heavily indebted euro-zone country was used during the presidential campaign as
a caricature for the horrors of European-style socialism. But their current
finances are not dissimilar, with one difference being that the US can't count
on outside help as the Greeks have received.
It remains to be seen how US
politicians choose to approach the problem. Republicans, having defended their
majority in the House of Representatives, could simply let the country plunge
off the cliff in the hopes that it would be blamed on Obama. Or, on the other
hand, their willingness to compromise may have been increased by virtue of losing
the presidential election badly. Republican Speaker of the House John Boehner
on Wednesday pledged to work closely with the White House as negotiations
begin. He said that lawmakers won't be able to solve the country's problems
overnight, but said that voters "gave us a mandate to work together to do
the best thing for our country."
Greece's economic problems and
the resulting austerity
packages it has passed have plunged the country into five straight years of
recession. Germany, Europe and the world are hoping that the same fate is not
in store for the US.
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