By Adam Creighton
Whoever won the US presidential election was always going to face a daunting challenge: how to steer the nation clear of fiscal catastrophe without crushing an economy floundering in the wake of the worst slump since the 1930s Depression.
Four years after the global financial crisis dramatically unfurled itself, what Americans call the great recession is still not over. More than 12.3 million people are still unemployed and American wages are growing at their slowest pace since 1986.
"The United States economy's post-GFC healing process remains unusually hesitant," says Westpac analyst Russell Jones.
President Barack Obama's decisive victory against Republican challenger Mitt Romney has done nothing to alter the congressional gridlock that has repeatedly thwarted attempts to avert the looming fiscal cliff that is forecast to plunge the US into recession and drag the world down with it.
"If anything, Obama's re-election increases the chance the United States will fall over the fiscal cliff, at least for a few months," says Adam Lockyer, a lecturer in US politics at the University of Sydney's US Studies Centre.
"He's more likely to take negotiations to the eleventh hour and engage in political brinkmanship to elicit a long-term solution, but this carries the risk of no solution at all," he says.
While the Democrats control the White House and the Senate, Republicans still hold a sizeable majority in the House of Representatives.
By a quirk of history the US faces a sudden, automatic fiscal reckoning on January 1. Without congress lifting a pen, a slew of spending cuts and taxes totalling $US668 billion kick in.
Perhaps the largest fiscal reversal in history, it will almost certainly derail the US's tepid track back to economic normality unless politicians cobble together some alternative.
Nathan Sheets, Citi's global head of international economics, said during a visit to Sydney last month that unless the cliff could be averted, the US economy would stumble into recession next year, potentially sapping the growth rate of the world's biggest economy to minus 2 per cent.
"I'm hard-pressed to think of a single country that won't be damaged economically," he said, emphasising the ripple effect of a US slowdown on China, and hence on Australian exports.
Following the terrorist attacks in the US in September 2001, then president George W. Bush negotiated a range of stimulatory tax cuts: the top rate of income tax fell from 39.6 per cent to 35 per cent, capital gains tax dropped from 20 per cent to 15 per cent; payroll tax fell from 6.2 per cent by almost a third; and taxes on dividends tumbled. About 90 per cent of American workers will face a real tax increase one way or another as these measures are reversed, increasing the government's tax haul by $US532bn.
Meanwhile, January 1 triggers the doomsday clause, which curbs annual spending on defence, unemployment and medical benefits by $US136bn.
Congress could only agree to increase the US debt limit to $US16.3 trillion last year by insisting that, if the bipartisan super committee created to come up with spending cuts failed to reach agreement, then a doomsday clause would ensure cuts occurred anyway.
The committee couldn't agree. "The measures in the clause were meant to hurt Democrat and Republican constituents roughly equally," says Lockyer, pointing to broadly equal cuts to defence and social security programs.
Sheets says "doing too much too fast is a sure-fire recipe for a recession", pointing to a similar cliff in the late 60s that pushed the economy into recession.
Whether commentators want the US to endure or avoid the approaching cliff depends on which economic principles they subscribe to.
"People in the White House are Keynesians," says Mitchell, arguing presidential advisers are too focused on the level of aggregate demand in the short run rather than the pernicious effects of increasing marginal tax rates.
In any case, he says, the fiscal cliff is really a slope, because businesses and households are rationally factoring in tax increases and spending cuts into their plans, implying the sudden economic crunch widely feared will not occur.
Indeed, the evidence on whether debt-fuelled government spending sustains economic growth, even in the short term, is highly contested.
Most people understand that all government spending must ultimately be paid for with taxes, out of either present or future income.
The far more popular St Augustinian approach to fiscal reform — grant me chastity, but not yet — simply foists tax on future generations without asking their permission.
It also ignores politicians' natural temptation to defer tough decisions. The fiscal cliff might in fact be a useful, even serendipitous, mechanism that forces fiscal prudence on US politicians.
"America's never been about what can be done for us," Obama said on Tuesday night in his rousing victory speech, echoing John F. Kennedy's immortal exhortation.
"It's about what can be done by us together, through the hard and frustrating but necessary work of self-government.
That's the principle we were founded on."
If the President truly wants to encourage individual responsibility and greater citizen engagement with government, as he suggests, he must return the US to fiscal probity without eroding further Americans' capacity for individual enrichment with high taxes and misguided social interventions.
This article was originally published by The Australian