Obama has led US to 668bn bill – and to the edge of a financial abyss
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New York voters took it for granted that Obama would be re-elected but the country is peering over a fiscal cliff
On the streets of Manhattan last week, the American public were more concerned about the delay in restoring their public services after Hurricane Sandy than about the entrails of politics following the presidential elections.
Now, though, all America is having to peer into an abyss – or, to use the metaphor of the moment, over a ‘fiscal cliff’.
It describes the moment on January 1 when, unless the Republican-controlled House of Representatives and the Democrat President come to an agreement, huge tax rises will be accompanied by some deep federal spending cuts that experts fear will tip the country into recession.
The plan is that $136 billion (£85.5 billion) in cuts – 0.8 per cent of GDP – will come in at the same time as $532 billion of tax increases, taking a total of $668 billion out of the deficit, or four per cent of GDP.
The cuts include defence and unemployment benefits; the tax rises reverse all the Bush-era tax cuts, and will hit the middle classes. They will also hit employers by increasing payroll taxes.
The programme will be anti-growth and anti-enterprise, but Republicans claim that it is the only option, given the Administration’s refusal to address the deficit, and the country’s colossal debt, in other ways. It is the main reason why the euphoria of the first Obama victory in 2008 has not been repeated and why the stock market slid south when it was realised four more years of Obama were being served up.
Corporate America especially is in despair. For them, there is no end in sight for over-regulation, debt and financial incontinence: and the Chinese, especially, are in their rear-view mirrors, coming up fast.
This is a deeply divided country: divided not between Democrats and Republicans, or even liberals and conservatives, but, it seems, between givers and takers.
On the one hand there are the wealth creators and the self-reliant, who want the state out of their lives and a fair chance to rebuild business, enterprise and their bank balances after the debacle of the banking collapse of 2008.
On the other is the coalition of minorities put in place by President Obama, and which he exploited to secure his victory. Many of these people depend upon the welfare culture he has created – what the state calls ‘entitlements’.
The President’s plans to implement Obamacare – his health insurance programme – will only add to this, with the current $16 trillion debt reaching at least $20 trillion by the end of his term. One reason why taxes are scheduled to rise so much is that the Democrats have been so reluctant to cut back on welfare benefits for their clientele.
The President celebrated winning a second term with his family last night, but he has no time to relax as he must deal with a possible financial crisis
The problem is that entitlements have to be funded, and the private sector increasingly resents being asked to pay higher taxes to do this, draining the productive sector of the economy of funds for investment.
People who run or work in private enterprises fail to see why they should work harder to fund Mr. Obama’s clientele. And when they feel disincentivised, the country fails to achieve the growth it needs to prosper again.
The American electorate, on the other hand, took a conscious decision last week to avoid a confrontation with economic reality. The debt crisis, however, cannot just be brushed under the carpet.
As several European countries will testify, the more a nation borrows, the more expensive its debt will become to service.
Even some Democrat supporters refer to the ‘Latin American’ way in which politics is now done in this country. Large groups of voters are bought by bribes, and are bribed by a President who poses as morally superior and who uses public money to buy off his clientele.
Paul Ryan, Mitt Romney¿s running mate will be the architect of a compromise plan for fixing the economy
The ethics of this stink, and it will become harder and harder to turn a blind eye to the practice, even with a media as supine as America’s.
The economics of it, however, are even worse. There is a link between unemployment stubbornly at around eight per cent – where it was when Mr. Obama was first elected – and higher ‘entitlements’.
The incentive to work and to create wealth, as opposed to taking it from someone else, is steadily reduced. Meanwhile, the government borrows another $3 billion every day.
Even if a compromise is reached before January 1, and some means of saving more money can be found to prevent the enterprise-crushing tax rises, that will only be buying time.
At some stage a serious deficit reduction plan will have to be agreed, or America will head the same way as the eurozone. Paul Ryan, Mitt Romney’s running mate, is the architect of such a plan. However, the public just weren’t ready for that last week.
The mood is likely to change by the time of the mid-term elections in 2014, especially when it is realised how much Americans in work are paying for Americans who won’t work.
There may then be a historic, once-in-a-generation moment when someone like Mr. Ryan – or possibly even Ryan himself – can convince the public that the whole balance of the American state has to change. But at the moment, all that is on offer is the hope of compromise on the fiscal cliff.
When things get worse – as they will – it will be America’s moment to realise that the rhetoric of ‘change’ has, instead, to be put into painful practice.