What the "fiscal cliff" really means


The 2012 race for the American presidency was about class.

For the first time since the 1960s, a Democratic incumbent ran a campaign to raise taxes on the monied elite against an opponent, the Republican quarter-billionaire Mitt Romney, who embodied the interests and attitudes of the monied elite.

Romney, for his part, enhanced the president’s populist strategy by campaigning on the same economic views that brought the US economy to its knees four years ago.

With Barack Obama back in the White House, some say 2012 was a class war from which liberals finally emerged the victors.

It wasn’t. It was a battle. The war continues.

If liberals had won the class war, we’d be talking about how to create jobs for the millions who want them, and from that, ensuring their freedom from want and fear.

Instead, we are talking about the federal debt.

A class war waged by the rich on working Americans for 40 years makes the reason for anemic growth – lack of aggregate demand – nearly impossible to see. So all eyes are now on something called the "fiscal cliff."

Here’s the long answer to what that means. If nothing is done by the first of the New Year, more than US$1.2 trillion will be automatically cut from the federal budget.

At the same time, tax cuts enacted under former President George W. Bush will expire. Because growth in the US economy remains weak, some are saying that the double impact of spending cuts and tax hikes may end up sending the economy into another recession.



"Cliff" is a misnomer. It’s really the threat of austerity that looms.

"Austerity" is a term of art with the power to spark protests in the eurozone but scarcely a peep in the US.

During the 2012 campaign, Romney issued dire warnings. He said that if we don’t tighten our belts soon – if we do not enact significant austerity measures to contract rampant spending on social insurance programs like Social Security and Medicare – the US is headed toward Spain and Greece.

Of course, belt-tightening is why millions have taken to the streets of Europe, and the more the belt tightens, the more likely it will strangle the eurozone.

Austerity fails to raise the hackles of the US electorate, because Americans have largely avoided it.

In one of his first acts as president, Barack Obama shepherded through Congress an US$800 billion spending bill that counteracted the downward spiraling of 2009.

This is why the unemployment rate never remained long in the double digits, and despite appearances to the contrary, we have not had a serious national debate over raising taxes or spending cuts.

And the debate is still not serious.

What’s left out of news coverage of the "fiscal cliff" is the fact that the large federal debt is due almost entirely to the Bush tax cuts (which disproportionately benefited the wealthy), the debt-financed wars in Iraq and Afghanistan and a prescription drug plan that was essentially a corporate giveaway.

The only thing Republicans are not responsible for is the effect of the Great Recession on the government’s tax receipts.

Yet Republicans would have us believe "entitlements" are to blame.

In fact, Social Security isn’t broke. It will be solvent for years.

And once provisions in the new health care reform law (often called Obamacare) go into effect, Medicare should also be in good financial shape.


Class war

Which brings us to the short answer to what the "fiscal cliff" means – it’s just another battle in the long class war despite following liberalism’s recent victory.

Social Security and Medicare largely benefit Americans who depend on them when they become too old or too sick to work.

Congressional Republicans last year picked up where they left off during the Bush years.

They refused to raise the federal debt ceiling until the president extended the Bush tax cuts for everyone, even tax cuts for the very, very wealthy.

Obama wanted to extend them for the first US$250,000 of all Americans and return to the top marginal tax rates of the Bill Clinton years.

The Republicans balked, sending shocks waves through Wall Street and international financial markets. Suddenly, the impossible seemed possible – that the United States might not honour its debt.

Republicans and Democrats avoided this by agreeing to "sequestration" – the real name for the "fiscal cliff."

Obama got the extension of the Bush tax cuts for middle-class Americans and Republicans got the spending cuts they wanted. For Republicans, though, this was always a gamble.

They accepted the sequester because they believed they would retake the White House.

Prior to 2012, no American president has been re-elected in the modern era during a recession, and this recession has been far worse than most.

Republicans expected to win, and so did not feel their agreement to sequestration was going to hurt them politically.

Now Republicans face two dilemmas. One, if they don’t concede to raising taxes on the rich (which Obama ran and won on), they risk alienating the electorate.

Two, if they don’t concede on extending tax cuts on the middle class, which spends what it earns (the rich don’t), they risk being blamed for sending the economy back into a recession.

The president has the advantage, because he doesn’t have to do anything. Once we go over the "fiscal cliff," he can force Republicans to obstruct cutting taxes on the middle class, thus discrediting them even more.

Here’s what this means. The "fiscal cliff" is another battle in the long class war by the rich on working Americans.

But it is worth fighting and one that liberals, led by Obama, should be able to win. The war continues, but if the Democrats play this right, it could be the long beginning of the end.