The fiscal cliff deal proves Congress is working

By Anatole Kaletsky
January 2, 2013

The U.S. fiscal cliff was dodged in pretty much the way that seemed most likely after November’s election: a bipartisan deal in which pragmatic Republicans, no longer focused on ending the presidency of Barack Obama, joined moderate Democrats to prevent economic sabotage by extremists from both ends of the political spectrum. On Wall Street, the immediate reaction was euphoria. But among mainstream economists and political commentators in Washington, it was cynicism.

While stock markets around the world approached their highest levels since the 2008 financial crisis, media headlines emphasized grim forebodings: Fresh stand-off looms after US cliff deal (Financial Times); Budget deal passes, debt ceiling looms (Wall Street Journal); Deal done but threats remain (Washington Post); Bigger showdowns loom after fiscal cliff deal (Reuters); House backs tax deal as next fight looms (Bloomberg).

Investors’ initial reactions are often misguided, especially to complex political events, but this time the markets will probably be proved right, and the pundits wrong. This week’s deal marked a genuine, and most likely sustainable, breakthrough for reasons of both politics and economics.

Politically, the bill’s decisive majorities in both houses of Congress showed that the U.S. Constitutional system is now less dysfunctional than widely believed. While ideological divisions may still be as wide as ever, November’s election transformed the political calculus for pragmatic Republicans such as John Boehner and Mitch McConnell. Instead of dedicating all their efforts to ousting Obama or wrecking his signature policies such as healthcare and financial reform, pragmatic Republicans must now consider how they might shape the president’s agenda over the next four years to protect their own vital interests and those of their constituents and financial supporters.

The most vital of these interests is to avoid another recession that would be calamitous for American businesses and workers, given the still-fragile condition of the U.S. economy and financial system.

The United States may now have, for the first time since 2009, a legislature capable of creating bipartisan majorities of pragmatic Republicans and Democrats working together on issues of fundamental importance to American voters. The more this pattern becomes established, the more it will neutralize radicals, both in the Tea Party and the Democratic left. Having compromised so many principles and suffered such acute political embarrassments during the fiscal cliff bargaining, the last thing Republican leaders will want to do is repeat the same experience in two months’ time. Future policy clashes, at least over economic policy, are likely to be less viciously adversarial, not more so, especially when the ultimate outcome of the argument is obvious and inevitable, as it was in the case of the fiscal cliff.

But will avoiding a default by the U.S. Treasury be seen as necessary and inevitable in the same way? This will depend on President Obama discovering an interest in economic policy detail that was notably absent from this recent debate and from his first term generally.

Most American voters believe, according to opinion polls, that the United States faces a grave budgetary crisis, and that public spending is rapidly rising, implying a slide towards Greek-style bankruptcy unless deficits and debts are brought under control. These statements are manifestly false.

U.S. deficits and debt, far from rising to infinity, are actually quite stable. Deficits have been halved since 2009 and will decline by about $150 billion annually in each of the next three years, according to the Congressional Budget Office. Meanwhile total debt is projected by the CBO to stabilize at around 82 percent of GDP from next year until 2018. And that is before any of the tax hikes agreed to this week. Taking account of roughly $620 billion in extra revenues raised by the fiscal cliff deal, U.S. debt will stabilize at a significantly lower GDP share and will probably do so by the middle of this year. This helps explain why the panic about national bankruptcy in Washington does not seem to affect private investors, who happily lend money to the U.S. government at the lowest interest rates on record.

Yet President Obama has made no effort to convey this reassuring information to American voters. Instead he has perpetuated the myth that the United States faces an urgent budgetary crisis, most recently in his televised speech on the fiscal cliff, when he described further deficit reductions as a top priority.

As long as voters are paranoid about a Greek-style fiscal crisis, the looming showdowns predicted by pessimistic pundits over Treasury debt limits may indeed be inevitable, since deficit hawks will argue that avoiding future national bankruptcy is even more important than avoiding an immediate default on Treasury debts. But suppose the president were to explain to voters that there is no real fiscal crisis and add that the extra revenues raised in this week’s deal make the long-term budgetary position even more secure. The threat of a confrontation over the Treasury debt limit would quickly vanish. With this threat averted, business and consumer confidence would improve, economic growth would accelerate, and government deficits would shrink rapidly, without any further major tax hikes or spending cuts.

In short, suppose President Obama decided to become a “deficit denier,” as described in this column last year. Liberals, such as Paul Krugman and Joe Stiglitz, could explain this denial as Keynesian stimulus. Conservatives could call it supply-side economics, as they did under President Ronald Reagan. Either way, deficit denial could help to avert future budget crises and accelerate economic growth.

If Barack Obama could make deficit denial a respectable position again for American politicians, as it was under Reagan, the success of his presidency would be assured.

PHOTO: REUTERS/Joshua Roberts 

9 comments

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I wish I could agree with you a hundred percent;
but the last minute hashed up job is far from ideal, and is indicative of a huge degree of dysfunction in Congress.

Imagine if the time and effort wasted in months of senseless wrangling can be invested into something constructive, some positive, something conducive to world peace and better human rights in our country as well as all over the world — many more of world’s problems will get tackled head on, instead of delayed, ignored, misunderstood, or, in the worst cases, handled atrociously.

Posted by Janeallen | Report as abusive

hmm, interesting how the author spins this thing. It’s like cramming for the final exam when you did not study all year. This is the most dysfunctional statement i have ever seen.

Posted by ofilha | Report as abusive

The problem is less with Congress than with the President–who opens every comment with a non-negotiable position. Thus, as soon as the fiscal cliff issue is (temporarily) resolved, he issues a statement saying that he will not allow spending issues to be part of the negotiation process for raising the ceiling on the debt. Thus, there is a limited opportunity for negotiating a resolution if one party tells you that a critical item (spending) linked to the debt is not part of the discussion.

The President fails to acknowledge that each of the 435 members of the House were also (re)elected in November, and many ran on a platform to get spending and debt under control. They have as much an obligation to hold their position as does the President, and are significantly closer to the wishes of the people than that same President.

The President has already asked for the authority to raise the national debt, but that would be in violation of the Constitution. I should like to think that if a Republican President asked for this same privilege the Dems would voice strong opposition (and rightfully so!)

That’s the structure of our government–and gridlock was designed into the Constitution– to prevent one party or branch from exclusively controlling the dialogue, and ultimately, the legislation.

Posted by COindependent | Report as abusive

The author must be checked!!! – It is this king of stupid jurnalism that is killing the country. NO THE CONGRESS DOES NOT WORK. It was OBVIOUS that here was a majority for the deal acroiss republicans and democrats – But what is broken is the power of the speaker of the house to prevent votes from reaching the house of representatives. IN OTHER WORDS: a single guy can prevent the will of the American people – THIS my friendly author is what is BROKEN!!!!

Posted by Peertoperr | Report as abusive

@ Peertoper your emotions indicate that you believe that Congress should have quickly reached some compromise and moved on. But note, the fiscal cliff has been a known and quantifiable issue for over a year. The fact that Congress and the President waited until now was a problem they created (most likely due to the election). When the parties involved are more concerned about their own personal well-being (e.g. re-election) then tasks do not get done in a reasonable amount of time.

Most importantly, every time Congress reaches a compromise (a) the difficult issues do not get addressed, and (b) the American taxpayer takes the hit. If you think this is a problem exclusive to one party or the other, go back and read history for the past 40 years. The problem is jointly owned by each party–as they continued to borrow and spend regardless of who was in the White House or who controlled Congress. So, go ahead an convince me they always have the citizens interests in mind….

Just watch the “negotiations” for the funding for Hurricane Sandy. $60 billion falls out the sky and it’s a feeding-frenzy for every special interest. At least $10 billion of the proposed relief has nothing to do with the impact of Hurricane Sandy. Logically, they should fund relief incrementally to fix local problems–but that takes too much work. Should we use taxpayer funding to rebuild private property–I am not sure, but I thought that was what insurance was for? If the private insurers think it’s too large a risk to ensure, then why should the fed step in and rebuild it? I am not saying we should not help, but much like the levees in New Orleans, why do we rebuild in the same place that is exposed to the very same risks?

However, politicians are always prepared to indiscriminately spend “other people’s money”–and that is why you have trillion dollar+ annual deficits.

Posted by COindependent | Report as abusive

And if the Tea Party decides to damage the full faith and credit of the US in order to get their way, it will prove that Congress does not work

Posted by Leftcoastrocky | Report as abusive

After two full years having the title “Speaker of the House” but not performing the job, John Boehner has stepped up and become Speaker of the House. His next step should be to discipline those members of the House who are still attempting to sabotage the national economy in pursuit of ideological extremism.

Posted by QuietThinker | Report as abusive

No matter how dark, someone will always see a silver lining. For pundits to call this success is ludicrous when millions of people have been hit with higher taxes. They’re all lying and telling us the sky is blue.

Posted by ptiffany | Report as abusive

I could agree to say that “the congress works”.

Approximately half of it works against the other half.
This is really hard work.

Considering the salary of the congressmen (and women), in a well managed company, this would be considered SO counterproductive that almost all would be fired, with the exception of those who agree with the CEO.

Then if things still go very wrong, the CEO might loose his (her) job.
For a country that believes so hard in capitalism, this is how things should be.

Posted by garilou | Report as abusive