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Dark clouds for US as fiscal cliff looms

By Zhao Jinglun: 0 Comment(s)Print E-mail China.org.cn, November 20, 2012

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Hard landing [By Jiao Haiyang/China.org.cn]

The United States is facing a looming "fiscal cliff". If President Barack Obama, just elected to his second term as president, cannot reach agreement with the lame duck congress on a sweeping deficit reduction package before the beginning of 2013, the country will fall off the fiscal cliff as across-the-board tax hikes and spending cuts kick in automatically, potentially throwing the economy back to recession.

If nothing is done to avert the cliff, taxes would rise by US$6 trillion over ten years, US$347 billion in 2013 alone. On the spending side, most defense programs would be cut by 9.4 percent. Most nondefense programs outside of entitlements – Social Security, Medicare and Medicaid – would be sliced by 8.2 percent. Medicare would be reduced by 2 percent, while Social Security and some other programs would be exempt.

How would this impact the US economy? The Congressional Budget Office projected that real economic growth would decline at an annual rate of 2.9 percent during the first half of 2013. Unemployment would rise to 9.1 percent by the end of 2013.

How did the United States get to the "fiscal cliff"? As the Chinese saying goes, "It takes more than one cold day for the river to freeze three feet deep." Americans have been living beyond their means for decades, buying homes and luxury items they could not afford. On top of that, huge defense spending and mandated health care have led to large deficits. As such, the country has been dependent on external financing to the tune of $500 to 600 billion a year, 5 percent or more of GDP.

Federal revenue covers little more than 60 percent of expenditures. Spending has climbed to around 25 percent of GDP. Even if it could be cut to 21 percent, taxes would still have to be raised in what would amount to big changes in budgetary policy.

Despite this unsustainable pattern, the prospect of a deficit reduction deal does not look good given the political polarization in Congress. Even though both sides say they want a deal to avert the cliff, Obama has said he will not sign any bill that extends the tax cuts for the rich, but wants legislation that extends the tax cuts for families earning US$250,000 or less. John Boehner, Republican of Ohio and speaker of the House, says he will not accept any deal that raises tax rates for the rich beyond the current Bush-era levels.

House republicans, especially those who call themselves the "Young Guns" – Majority Leader Eric Cantor of Virginia, Kevin McCarthy of California and Paul Ryan of Wisconsin (the 2012 GOP vice presidential candidate) declare the House will never pass a plan that includes tax increases.

Conservative Republicans are not just concerned with taxes, they are even more concerned about military spending cuts. During the presidential campaign, both Mitt Romney and Paul Ryan denounced a US$600 billion military spending cut over nine years which House Republicans, including Ryan, voted for last year.

Those Republicans, who are adamantly against any tax cut, are the same people who in 2011 refused to raise the debt ceiling. They wanted to use large tax cuts to starve the beast of big government. If default brought economic hardship and the president and Democrats got blamed, that would be just fine for them.

Their extreme partisanship and loss of institutional patriotism were roundly condemned by Thomas Mann and Norman Ornstein in their new book It's Even Worse Than It Looks: How the American Constitutional System Collided with the New Politics of Extremism.

Mann and Ornstein cited a 2010 plan to reduce deficit. The resolution, brought to a vote in the Senate, was co-authored by Democrat Kent Conrad of North Dakota and Republican Judd Gregg of New Hampshire and had substantial bipartisan support. John McCain supported it. Even Mitch McConnell, Senate Minority Leader, went out of his way to urge support for the plan.

But on January 26, the resolution, which received the support of 53 senators but short of the 60 votes necessary for cloture, was killed by Republican filibuster. Both McCain and McConnell voted to sustain the filibuster and block the resolution, simply because President Obama was for it, and its passage might gain him political credit.

Afflicted by acrimony and hyper-partisanship, the American political process has become dysfunctional. For decades, pollsters have been asking Americans: "Do you trust your government to do the right thing most of the time?" These days, only 20 percent or less say yes. To avert the fiscal cliff, only tremendous outside pressure will force the parties to reach a compromise.

The author is a columnist with China.org.cn. For more information please visit: http://www.keyanhelp.cn/opinion/zhaojinglun.htm

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