Will the US economy fall over the “fiscal cliff”? As Socialist Worker goes to press, this question remains unanswered.
Whatever happens, the crisis represents the paralysis of the political process in America. This paralysis is all the more remarkable given that both Barack Obama and his Republican opponents in Congress are fully signed up to neoliberalism.
Our story starts in July 2011, when the Republicans, swept to victory in Congress by the Tea Party movement, refused to raise the limit on federal government debt.
Many of the more extreme Republicans are so convinced that big government is the enemy that they wanted to force the US to default on its debt.
This was idiotic in so many different ways. For one thing, as ex-central bank chief Alan Greenspan pointed out, “the United States can pay any debt it has because we can always print money to do that.” The dollar is the world’s main reserve currency, and as long as foreigners are willing to accept it, the US can cover its debts.
Nor is the US debt unsustainable. The Marxist economist John Weeks has calculated that “when we take out what the federal government owes itself [about 40 percent of the total], the US public debt is a smaller proportion of GDP than the same debt measure for any other major developed country. Indeed, it is so low that it is no problem.”
What is true is that the budget deficit—the difference between what the US government spends and what it receives in tax revenue—has risen in the last few years.
This is mainly because the great recession of 2008-9 and the sluggish “recovery” that followed have meant that tax payments have fallen at the same time as even a welfare state as mean as the US has had to spend more to support the large numbers of unemployed.
This spending is a good thing—if the US government hadn’t borrowed and spent more, the slump would have been much worse and the recovery even feebler.
In Europe as well as the US the super-rich and their media and political hangers on have done very well in the neoliberal era. This coalition has defined the deficit as the big problem that is holding the economy back.
Obama agrees with the Republicans about this. So he ended the debt crisis in July 2011 by agreeing on a set of tax increases and cuts in spending that were set to come into effect automatically on 1 January. The only way to stop this was for Congress to come up with a programme of measures to cut the deficit.
These automatic increases and cuts are the fiscal cliff. If implemented, they will take about £370 billion out of the economy, about 2 percent of national income. Although they would actually come into effect gradually, they would probably push the US back into recession.
As a way out, Obama is insisting on a largely symbolic tax increase on those earning £155,000 a year. But in exchange he is willing to agree to cuts in the most important federal welfare programmes. These include Social Security (pensions), Medicare (health insurance for the elderly) and Medicaid (healthcare for the poor).
This kind of package probably corresponds to what the core of US big business would like to see. It means a further reduction in, but not the abolition of the US welfare state. Working people and the poor will thus continue to pay for the crisis.
But a large number of Republican Congressmen and women are opposed to any tax increases at all. Just before Christmas they humiliated the Republican speaker of the house, John Boehner, by failing to support his own proposed compromise. This makes it harder to achieve a deal.
When Congress initially rejected the 2008 bank bailout the financial markets went wild. Commentators predict that the same will happen now and this will force Obama and the Republicans to compromise.
Reality will no doubt impose itself on the warring politicians somehow. But what’s for sure is that working class Americans aren’t represented at the bargaining table.