The last acts of the 112th Congress: partisan gridlock, public frustration, and potential economic collapse.
The Mayan Apocalypse came and went, and we’ll all breathe easier with “the end of the world” behind us. Ahead, unfortunately, lies the so-called “fiscal cliff.” Coined by Federal Reserve chairman Ben Bernanke, the term refers to a potentially-toxic combination of tax increases and spending cuts slated for New Year’s Day. That much is common knowledge. What’s often forgotten—or ignored—by politicians and the media alike is that this is a problem of our own making. The fiscal cliff, such as it is, may prove a disastrous wound to the still-fragile American economy. Tragically, it would be entirely self-inflicted.
How did it come to this? Put simply, Washington politicking at its finest. Tax breaks enacted under George W. Bush will expire come the new year without congressional extension, threatening higher rates across the board. Planned spending cuts are the product of the 2011 agreement raising the nation’s debt ceiling, a procedure known as sequestration. Unless Congress enacts $1.2 trillion in substitute cuts, current law triggers sequestration automatically on January 2, 2013. It’s draconian by design, intended to encourage bipartisan cooperation toward a more realistic alternative. Thus far, it’s failed miserably.
The clearest problem is partisan, a result of November’s presidential election. Having won a second term 51%-47%, President Barack Obama claims something of a voter mandate backing his solution to the crisis. Congressional Democrats agree, proposing extension of the Bush tax cuts for all but the wealthiest Americans and targeted reductions in spending. For their part, Republicans initially pledged opposition to any plan raising taxes at any income level. They instead suggested Congress identify $1.2 trillion in spending cuts alone, the defense budget exempted. Negotiating for their respective parties, President Obama and Speaker of the House John Boehner have yet to reach a compromise.
That may be changing. While the Speaker originally aimed to prevent any tax cut extension which didn’t also benefit the wealthy, several high-profile Republican congressmen have broken ranks to endorse the Democratic position. According to one, Republicans need “to make sure we don’t raise taxes on 98% of the American people… and it’s the right thing to do.” Recognizing his position as politically untenable—a majority of Americans favor a higher top rate—Speaker Boehner has since offered a plan raising taxes on those earning more than $1 million a year.
Unfortunately, too many congressional Republicans regard the Speaker’s efforts as political treason. In an embarrassing setback, Boehner was forced to abandon his proposal after conservatives denied adequate support for its passage. Wielding the ultimate trump card of a presidential veto, the White House has thus far refused to compromise on the tax issue . That makes the GOP revolt all the more worrying, threatening to upend delicate negotiations otherwise near conclusion. The burden is on the Speaker to control in his more-fervent members in the interest of averting the fiscal cliff.
Whatever their next moves, Boehner and the President are running out of time. In a letter to Congress delivered Wednesday, Treasury Secretary Timothy Geithner warned that the United States would reach its debt ceiling again as early as next week. As a result, the Treasury Department will undertake what it calls “extraordinary measures” to forestall that event as long as possible. Such measures may delay the inevitable for up to two months, but the question of America’s debt will eventually return. When it does, ardent fiscal conservatives may again demand default, economic consequences be damned.
Recent polling suggests such an outcome would bode poorly for Republicans. Most Americans already fault the GOP for failure to resolve the fiscal cliff, while congressional Democrats charge their colleagues with obstruction; Speaker Boehner declined to call the House into session before its next official meeting on Sunday, leaving less than forty-eight hours for debate before the January 2 deadline. After months of partisan gridlock, it’s unlikely Congress will reach a deal in so short a time. Stubborn though Democrats have been, Republicans have again played politics with the well-being of the American economy. Should it go over the fiscal cliff, they may well take the blame.
Should the worst come to pass, what then? No one knows for certain, but the outlook isn’t good; you can’t remove trillions of dollars from an economy overnight without serious blowback. The Congressional Budget Office (CBO) forecasts a 0.5% drop in real gross domestic product, the market value of all goods and services produced within a given country. That may sound insignificant, but with a GDP worth $15.09 trillion, a drop that size means $75.4 billion in lost production. Lower demand and limited capital would undo months of steady job growth, pushing unemployment over 9% by the year’s end. It’s difficult to imagine a more-frightening prospect.
It goes without saying that this sad state of affairs is unbecoming the world’s most powerful nation. For the government to have literally put itself in this position is worse, though (admittedly little) time remains to prevent catastrophe; it should have come sooner, but an eleventh hour solution would be preferable to none. If only one appeared at all likely.