x Abu Dhabi, UAETuesday 25 July 2017

America emerges from elections with little ability to compromise

After the votes were counted and the balloons had wafted down from the rafters, President Barack Obama awoke last week to an ugly reality: he had won four more years in the White House.

After the votes were counted and the balloons had wafted down from the rafters, President Barack Obama awoke on Wednesday to an ugly reality: he had won four more years in the White House.

Of course, no president wants to be turned away after only one term - America's constitution limits presidents to two four-year terms, and winning a second one has come to be regarded as an early sign that history might smile on the man.

But Mr Obama, America's first black president, had already made his mark in the history books. And few would argue that fate has smiled upon a man who inherited the worst economy since the Great Depression at the beginning of his first term, and now faces a bitterly divided Congress and a looming fiscal disaster before he can even begin to enjoy his second term.

By far the greatest challenge facing Mr Obama as he surveys the four years ahead is navigating the issues involved with what has become known as the "fiscal cliff". Economists and most politicians, Republican or Democratic, agree that the $600 billion (Dh2.2 trillion) package - a mix of tax hikes, expiring tax breaks and austerity measures that are supposed to automatically take effect on January 1 - could shave as much as 4 per cent off America's GDP growth in coming years unless politicians agree on an extension.

In effect, this is austerity on such a vast - some would say reckless - level that it might be enough to cast the world's largest economy back into recession, dragging a good part of the rest of the world along with it.

So it's all hands on deck in Washington, right? After all, Mr Obama's Democratic Party actually gained a seat in the Senate, and in the end his victory over challenger Mitt Romney should be viewed as a repudiation of the Republican Party's rightward "Tea Party" tilt since 2010.

Not so fast.

All sides in the United States speak confidently - when the issue of the fiscal cliff is addressed at all - that a deal to avoid a cataclysm will be agreed. But there is little sign that politicians in any quarter are preparing the ground for truly hard, painful and necessary decisions that will have to be made. Where is the bipartisan presidential "blue ribbon" commission? Or the White House invitation for lunch with congressional Republicans? Nary a leak has emerged of anyone's master plan to solve it all, either.

In fact, before the Romney campaign posters had even been recycled, some of the more right-wing Republicans were blaming his defeat on the fact that he had started sounding like a centrist. As Mr Romeny fought for the middle ground in November, he abandoned the radical social and economic proposals he had been forced to adopt to win the Republican nomination in the primaries.

This is a prescription for disaster, but not one that should be unfamiliar to Washington observers by now. In a campaign that featured a notable lack of substance, the fiscal cliff got precious little attention.

The one exception came in late October, during the so-called foreign policy debate, when Mr Obama rejected the idea that he would allow the nation's fate to be determined by what amounts to a budgeting gimmick.

"The sequester is not something I proposed, it's something that Congress proposed," Mr Obama said. "It will not happen." He had a point that the so-called cliff is an artificial limit set by Congress, although it was in response to the very real problem of deficit spending, which runs to the tune of $1 trillion a year.

Optimists seized on this statement as evidence of a secret plan - perhaps even secret talks between the White House and the rival camps in the House and Senate. If so, it's a secret kept so well that no one in notoriously leak-prone Washington has divulged the details.

It is true that some moderate Senate and House members from both parties have been working on proposed compromise bills that might be introduced between now and New Year.

Yet none of the key negotiators - Mr Obama, Republican House Speaker John Boehner or Democratic Senate majority leader Harry Reid - have said anything significant that suggests the angry partisan atmosphere of the election will be left aside so that practical, deeply vital compromises can be struck.

If the American public seems happy to ignore all of this ugly uncertainty for now, others are starting to worry. The day before the election, finance ministers of the G20, along with the IMF managing director Christine Lagarde, met in Mexico and identified the "fiscal cliff" as the most serious threat to the global economy. Their antiseptic prescription suggested that the US "carefully calibrate the pace of fiscal tightening to ensure that public finances are placed on a sustainable long-run path while avoiding a sharp fiscal contraction in 2013".

The chief executives of major American corporations and a group representing large pension and hedge fund investors separately sent letters to Congress warning that inaction would bring severe consequences on global markets. In the words of Scott Mather, a portfolio manager at the investment firm PIMCO: "The US will get downgraded; it's a question of when."

In spite of upbeat talk about a deal, many fear a repeat of the budget debacle of 2010, when Mr Obama and Republican leaders in Congress failed to agree to a deal to raise the US debt ceiling. That very public debacle threatened a default on Washington's debts, and caused the ratings agency Standard & Poor's to downgrade the US sovereign credit rating.

Mr Obama insists he will not sign off on any compromise that fails to include cuts in spending and revenue-generating measures, such as new taxes, while Republicans insist on spending cuts exclusively. In effect, since 2010, nothing has changed - not in either side's negotiating positions, or in the broad distribution of power in Washington.

So why is the president so sanguine? Either Mr Obama is convinced that the Republicans will read Mr Romney's defeat as a warning to moderate their obstructive attitude, or he believes that he will somehow be able to outflank his Republican opponents when the fiscal talks come down to the wire.

Markets basically yawned when Standard & Poor's downgraded the US sovereign rating in 2010, a fact that may actually embolden wounded Republicans to be just as obstructive this time around. Many seem to believe that they can precipitate a crisis by not compromising, in spite of Mr Romney's defeat, and cripple Mr Obama in his second term in the process.

The world, like the US electorate, has probably had enough of this kind of myopia from a country fond of claiming the mantle of global leadership. But as Mr Obama himself is no doubt realising today, the best moment of his second term may already be behind him.

 

Michael Moran is the editor-in-chief of Renaissance Insights at the investment bank Renaissance Capital. He is the author of The Reckoning: Debt, Democracy, and the Future of American Power and writes a blog with the same name at Slate