x Abu Dhabi, UAEThursday 27 July 2017

Neither side has the courage to avoid America's 'fiscal cliff'

Republicans and Democrats in the US are both taking the wrong approach to the battle over spending and taxes at the edge of the "fiscal cliff".

In less than a month, automatic tax increases and spending cuts worth $600 billion (Dh2.2 trillion) will start to hit the United States, threatening to plunge the world's largest economy into another recession that would shake the globe. Since President Barack Obama's re-election, Democrats and Republicans have been locked in frantic negotiations to stop the country from going over the so-called "fiscal cliff".

Even if US legislators strike a deal to replace the automatic arrangements with more realistic deficit-reduction measures - and the prospect of higher long-term savings - the effect might still be negative. The political process would probably spook financial markets, which could interpret the commotion as proof that America's fiscal problems are politically intractable and that the country's addiction to debt will eventually end in default.

The worst fear is that partisan paralysis will postpone a solution indefinitely and exacerbate the underlying problem.

Whether the United States goes over the "fiscal cliff" or manages to put the brakes on deficit reduction is anyone's guess. Either way, the blow to investors' confidence could result in higher interest rates on US debt, with unprecedented repercussions for the global economy. All this comes at a time when the economic woes of the euro zone are compounded by the sharp slowdown in growth of the Bric nations and other emerging markets around the world.

On the face of it, US Democrats and Republicans merely disagree on the relative balance between tax increases and spending cuts. Emboldened by Mr Obama's clear victory over his challenger Mitt Romney in last month's presidential elections, Democrats want a total of $1.6 trillion in new revenue over the next decade - $960 billion of which would be generated by ending the Bush-era tax cuts for those earning more than $250,000 per year. The president's plan also foresees 10-year cuts to federal spending of between $400 billion and $600 billion.

By contrast, the Republicans who control the House of Representatives prefer spending cuts of $1.4 trillion and new revenue of $800 billion. Under pressure from the small-government Tea Party movement on the libertarian right, the Republican Party is calling for a massive reduction of entitlement programmes. That includes social security and health care, especially federal schemes such as Medicare, Medicaid and "Obamacare" - the president's controversial health law that Republicans would like to repeal.

Above all, they are fiercely opposed to any tax increases, even for top earners. Virtually all Republicans in the House and the Senate have signed the so-called Norquist pledge never to raise taxes under any circumstances - a commitment named after Grover Norquist, a libertarian member of the Republican Party and founding president of the lobbying group "Americans for Tax Reform". Fearing an angry backlash from their voters, Republicans refuse to compromise on the pledge.

So while Democrats insist on higher taxes for the rich, Republicans demand less spending on welfare for the poor. However, this ideological divide distracts from the failure of both of the dominant economic orthodoxies that have bankrupted the United States and the rest of the West.

Both the political left and the political right are predominantly concerned with distributing resources to their own constituencies. Neither has credible ideas for sustained growth that can reduce debt and secure prosperity for all.

Democrats are right to insist on ending tax breaks for the rich that the country cannot afford. But they are wrong to refuse wholesale reform of federal spending programmes that are equally unsustainable. Instead of a federal government bureaucracy, it would be sensible to devolve the administration of social services to lower levels such as state governments and municipalities - in line with the US tradition of town-hall democracy. Crucially, Democrats should promote cooperatives and mutuals that deliver health care and other welfare at lower costs and in much more personalised ways.

For their part, Republicans must wake up to the fact that in a free-market economy, wealth does not simply trickle down from the affluent few to the masses. Rather, the American version of neoliberal capitalism has seen an unprecedented concentration of asset ownership at the top end. In 1974, the top 1 per cent of Americans owned the equivalent of just under 10 per cent of US national output. By 2007 this had soared to nearly 25 per cent.

Rather than attack big government, Republicans should confront big business - breaking up both monopolies and cartels as well as breaking down barriers to market entry. This is especially true in finance, but also in the healthcare sector that is dominated by large corporations that have failed to deliver lower costs.

Ultimately, the fiscal stand-off is about a new economic settlement for the future. The US needs to shift away from mere distribution in favour of the rich or the poor towards a growth model that generates prosperity for all - through innovation, higher wages in line with productivity and more widespread ownership. That requires strategic investment in education and help for those struggling with their mortgages.

Negotiations to avert the "fiscal cliff" show just how much US politics is hostage to economic ideology. The Republican commitment never to raise tax puts a sensible compromise virtually beyond reach, but Democrats also need to be more serious about reforming federal programmes. Both sides must abandon the old orthodoxies and embrace more innovative ideas.

 

Adrian Pabst is lecturer in politics at Britain's University of Kent and visiting professor at the Institut d'Etudes Politiques de Lille in France