Neil Macdonald: Playing political chicken with America's economy

It's simple, writes Neil Macdonald, Europe's financial crisis is real. The fiscal cliff in the U.S. is entirely of Congress's making and someone is going to pay a political price if nothing is done in the next few weeks.

For those who have missed the central point so far (at this juncture, you'd have to have been living in North Korea), yet another world authority on economics repeated it again last week: The number one threat to the global economy is the European crisis.

Canada and the U.S. have already felt the numbing power of what's been happening in Europe these past few years. Common sense, you would think, would dictate that both countries take all plausible measures to protect their banks, industries and citizenry from more incoming damage.

But America, as Americans like to tell themselves, is an exceptional place, and its politicians aren't about to be outdone by the Europeans.

Politicians here have created their very own artificial crisis, passed it into law, and, with an American flourish, given it a more dramatic name: the fiscal cliff.

The European crisis was the result of an optimistic but flawed deal — the euro itself. The common currency turned into an economic garrotte for its poorer members when tough times arrived.

The fiscal cliff is the result of a cynical and breathtakingly stupid deal. It exemplifies all that is wrong with U.S. congressional politics.

A game of chicken

Even though a solution to the euro crisis is not readily apparent, the Europeans persist after two years of trying to find one, and keep issuing public reassurances of unity to calm the markets.

Meanwhile, American politicians basically abandoned negotiations after creating their own crisis, preferring to spend the next two years campaigning for re-election.

Refighting the presidential election? Republican House Speaker John Boehner says fiscal cliff talks are at a stalemate. (Associated Press)

Now, after a month or so of discussions, they've decided it is easier simply to trade blame publicly and frighten both the American public and world markets.

John Boehner, the Republican Speaker of the House of Representatives, announced "a stalemate" last week.

Then this week his Senate colleague Lindsey Graham helpfully declared on CBS’s Face the Nation, "I think we’re going over the cliff."

America's fiscal cliff is one of those things that would be just about impossible to explain to aliens if they landed tomorrow and asked about it.

Unable to agree on a sensible plan to reduce government borrowing, both parties in Congress decided in 2010 to invent a scenario so idiotic — and so harrowing — that it would presumably force a compromise in order to avert the nightmare that would ensue if it were allowed to happen.

So, on Jan. 1, just a few weeks from now, a series of steep increases, one of them retroactive, will automatically kick in for every taxpayer. At the same time, more than $100 billion per year will be indiscriminately ripped out of government spending across the board.

The measures will slice more than four per cent from the American economy in the next couple of years, according to the U.S. government’s own accountants. That would almost certainly mean another recession. The consequences for America’s trading partners are self-evident.

But keep in mind: that is what it was meant to do. Both parties actually agreed to trigger a series of events neither of them wanted — never mind American businesses, workers and trading partners who are caught in the whipsaw.

Obvious solution

Even more absurd, the solution to this manufactured American crisis (unlike the real one in Europe) is obvious — a much milder combination of spending cuts and tax hikes. And American voters, who made their electoral decision on Nov. 6, overwhelmingly tell pollsters that is what they want to see happen.

But the politicians who created the problem in the first place now say they can't prevent it from going forward.

As always, media reports tend to lay equal blame for the political intransigence on both parties.

But the polling suggests the public will hold Republicans more responsible if the nation does indeed head over the cliff, as Senator Graham predicts.

Roulette game? President Obama is taking his fiscal cliff campaign on the road, channelling his inner Ronald Reagan.

That is because the Republicans have been taking a more aggressive, more overtly ideological approach.

The vast majority of Republicans in Congress have in fact signed a pledge created by the far-right anti-tax activist Grover Norquist: No new taxes, period. (And Norquist has the shock troops to punish any backsliders come the next election.)

At the same time, the GOP has taken the position that while overall government spending must decline, defence spending — the third biggest expenditure — should actually rise. Republicans want to give the Pentagon more funding next year than it asked for.

All this has left President Barack Obama and the Democrats in a reasonably comfortable political position, at least for now. 

The Democrats agree spending cuts are necessary. Further, Obama has offered, and the Democratic-controlled Senate has already passed a bill, to limit tax hikes to households that earn more than a quarter of a million dollars a year.

The vast majority of Americans, nearly 98 per cent of them, do not earn that much, and therefore most of them enthusiastically support the idea.

Comfortably re-elected, Obama is now channelling Ronald Reagan, taking his case directly to the public. His message is simple: If "Congress" — read Republicans — doesn’t do something by the end of the year, everyone's taxes will rise.

It's not only a politically potent statement, it happens to be true.

The fiscal cliff would damage America, never mind the economies that do a lot of business with America, and Republicans foolishly helped create it.

Now, to their horror, they're being cast as responsible for a tax increase on all taxpayers.

Faced with that, a few of them are already publicly repudiating the Grover Norquist pledge.

"I care too much about my country — I care a lot more about it than I do Grover Norquist," Republican Senator Saxby Chambliss, who is actually up for re-election in 2014, told a Georgia radio station recently.

Actually, you would think elected politicians who truly cared about their country wouldn't have allowed this situation to develop in the first place.

If the law remains unchanged, and the U.S. does slip into economic chaos beginning next month, the fiscal cliff will likely go down in history as a form of political lunacy. And any politician who fails to stop it because of a pledge to Grover Norquist will deserve what happens to him, or her, as a result.