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Fiscal Cliff: Phase one

By Henry D'Souza

Al-Jazeerah, CCUN, January 16, 2013


            As the US has already crossed its debt ceiling of $14 trillion and is now at $16.4 trillion, Secretary of the Treasury Timothy Geithner wants to do away with an official ceiling.  This change would allow the Treasury to print as much money as is needed.  Geithner implies that he sees more doses of Quantitative Easing as a solution to the American financial crisis.  The argument is that in good times, down the road, the national debt can be reduced – a Keynesian formula. 

Neither the Republicans not the Democrats support this view as future generations will have to bear this burden.  Said Republican Senator John Barrosso of Wyoming, the President has “maxed out his credit card.”1    On the other hand, if the debt ceiling is not raised, the country might default on debt payments for the first time in its history.  The ramifications for the world economy would be catastrophic.

            Had there been no agreement on debt reduction in Congress by the end of 2012, each household by law would have to pay an extra, an average of $3,400 per year, to yield about $607 billion.  This increase would have gone against President Obama’s promise not to raise taxes on those earning less than $250,000.2

            The dilemma was sorted out when Obama signed a Bill on Wednesday January 2, 2013 that would ward off a fiscal cliff.  The Bill originated in the Senate through the efforts of Joe Biden and Mitch McConnell and passed, 89-8.  The House vote which came soon afterwards was 257-167, for passing the bill; about a third of the Republicans voted with the Democrats.3

            As Obama wanted, the wealthy would pay more tax.  For those earning more than $400,000, and $450,000 for a couple, the tax rate will increase to the Clinton-era figure of 39.6%.   For this group, capital gains and dividends will be taxed at 20% instead of 15%.  For all those taxpayers below $400,000 the Bush-era tax rates will apply.  Payroll tax adjustments will affect middle-class families who will pay on average $1000 a year more.  These and other changes should yield $600 billion over the next decade.  The general feeling is that these tax increases are miniscule over a decade: “The economy should produce something close to $220 trillion in GDP… so that the tax hikes total less than a third of a percent of GDP.” 4   Congressmen have opted for growth rather than massive tax hikes. Sequester, the across-the-board spending cuts, was postponed by two months.  Unemployment benefits for those whose benefits expired after 26 weeks will be extended for a year.

            There was much criticism at the way the fiscal cliff was handled.  Tea Party members blamed those Republicans who put country before party and promoted the bill.  Chris Christie blamed the GOP for “toxic internal politics.” He was annoyed that Sandy victims were not given $60 billion that was promised for reconstruction.  A delayed bill only offered $9.7 billion as a temporary measure.  Republicans complained that they did not have a leader with a clear vision.  Reported Steve Peoples, the GOP was divided as ever and angry.5

            One must agree with Erskine Bowles, a co-Chairman of the bi-partisan National Commission on Fiscal Responsibility and Reform, that Congress “didn’t do any of the big stuff.”6   Instead of setting sights of obtaining $1.24 trillion over a decade, a crisis-ridden country should at least be thinking of the same amount every year for a decade.  The CEOs who formed a coalition called “Fix the Debt” also seemed to agree, arguing that a plan of $600 billion over a decade is not enough.7

            The rumor goes that the GOP “loathe” Obama and the last minute delay for passing the bill was designed to embarrass him.  Obama himself admitted this claim, but said that the country came first.  However Joe Biden emerged as a serious negotiator as he and Mitch McConnell crafted the Senate bill on the fiscal cliff.  That’s what Vice Presidents are there for, to back the President when the need arises.

            One would expect that matters like the debt ceiling, sequestration, and assistance to Sandy victims would come later in the next phase, perhaps in March.         




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