Washington must resist the temptation to go over the edge
There is still time for Barack Obama and John Boehner to strike a deal to avert the fiscal cliff. But the odds are rising sharply that they will fail to do so before New Year’s eve. Partisans on both sides believe there would be little difference in terms of impact on the US economy between striking a deal on December 31 or waiting until January 4. By then Mr Obama would have secured his automatic tax increases, and all he would then need to do is persuade Republicans to agree to a tax cut for the bottom 98 per cent of Americans. And on January 3 Mr Boehner would have been re-elected as speaker of the House, thus freeing his hand to make concessions. Such complacency is dangerous. The world is watching to see if the US can govern itself responsibly. No one has faith in Washington’s New Year’s resolutions.
Lawrence Summers, Mr Obama’s former economic adviser, compares the fiscal cliff style of governing to putting a “dagger in the steering wheel”. By making the consequences of failure potentially lethal, the dagger is supposed to encourage safe driving. But accidents happen just as frequently on Capitol Hill as they do on the freeway. Should January 4 come and go and should Mr Obama’s inauguration on January 20 take place without a deal, the economic costs of failure would start to escalate rapidly. Economists are already downgrading forecasts for US growth in 2013. By late January, the numbers would start to go into freefall. Neither Mr Obama nor Mr Boehner should toy with such a risk. It is imperative they make the concessions within schedule.
The chief onus remains on the Republicans. Having lost the presidential election and the popular vote in the House elections, the party’s rigid opposition to any tax increases is no longer tenable. Mr Obama can reasonably claim that he has a mandate to restore the Clinton-era tax rates on the top 2 per cent. He has hinted he would be prepared to accept a slightly lower headline increase – say to 37 per cent rather than 39.6 per cent. He has also indicated he would talk turkey on cutting costs for Medicare and Social Security. Mr Boehner says he will not consider a tax increase until Mr Obama has specified which spending cuts he could accept. But the Republican speaker has also declined to spell out his own proposed cuts. Neither leader wishes to be the first to propose reductions in popular programmes. But it is up to Mr Boehner to make the first move here.
Polls suggest Republicans would attract the lion’s share of blame if Washington heads over the precipice. They would deserve to. But the US would also pay a price – and a potentially huge one – were the bungee jump to fail. Both leaders must redouble efforts to ensure this proposition is never tested.
Copyright The Financial Times Limited 2012.