The United States Congress failed, at least technically speaking, to avoid the “fiscal cliff” yesterday – but no-one seems worried about that, because the financial markets were still closed for the New Year’s Day holiday when the deal was eventually passed, earlier today Australian time.
What matters a lot more is the fact that the deal is mostly just a stop-gap measure, meaning that much of the same negotiation and angst will have to be gone through again in two months’ time (under a new Congress, but with its political complexion largely unchanged), with no guarantee of success.
But the markets loved the deal. Australia’s All Ordinaries index was up 1.25% today, the Hang Seng was up 2.9% and European markets are up sharply in early trading. And that in turn is good news politically for Barack Obama, whose negotiating strategy – inexplicable to many of his natural supporters – makes sense only on the assumption that he regarded the cliff as a very serious danger. Although I remain sceptical on that point, to some extent it’s self-fulfilling: if the president acts as if something is really important, then that makes it really important.
Obama got one significant thing out of the deal: the Bush-era tax cuts on the very rich (those earning over US$400,000 annually) are gone for good. I’m no fan of tax increases, but given the dire fiscal situation overall, I don’t think it’s unreasonable to ask the wealthiest Americans to make a small extra contribution. After all, a marginal rate of 39.6% is hardly confiscatory. And not surprisingly, the increase is extremely popular.
But that produces only about a fifth of the extra revenue that going over the cliff would have entailed, and any decisions about spending have been deferred for another two months when, if nothing is done, the automatic cuts (“sequestration”) will again kick in. And at about the same time there will have to be another vote on increasing the debt ceiling – not itself a measure for new spending, but simply legal authorisation for the US government to pay the debts it has already incurred – which gives Congressional Republicans another opportunity to pursue their hostage-taking strategy.
Implicitly, the deal represents a judgement that this is a bad time for austerity and that fixing the deficit has to take second place to nurturing the still-feeble economic recovery. Hence Scott Galupo’s remark yesterday that “We’re all still Keynesians now.” But because that choice hasn’t been explicit, it’ll all have to be thrashed out again before the end of February.
Those on the left are arguing for more tax revenue, worrying – as did Paul Krugman, for example – that Republicans will “drive revenue so low through tax cuts that the social insurance programs can’t be sustained.” But even with the continuation of most of the tax cuts there’s plenty of revenue to fund a decent welfare system. The problem is that astronomical sums of money are being wasted on military spending and on benefits to the well-off.
None of the players in Washington are willing to tackle that problem: because, fundamentally, they don’t yet have to. For all its ballooning deficit, stuttering recovery and political gridlock, the United States is a long way from financial collapse. Monetary expansion has not led to inflation, and the rest of the world remains willing (even eager) to lend the country the funds that it needs.
The deficit is a long-term problem. It makes sense for the markets to be more concerned, at least for now, about the damage that an unhinged Republican caucus might do if it gets the upper hand. The fact that the markets have reacted so well today suggests that they think Obama has the Republicans’ measure.
Let’s hope they’re right.