--Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.--
The deal to break the deadlock in the US looks awful, far worse than going over the cliff, which I suspect would have been a lot less damaging than is usually assumed.
The 1 January agreement was a compromise over the tax to be levied on high salaries, which is purely a political issue with little bearing on the critical economic issue of how to close the deficit, and otherwise simply takes the line of least resistance, avoiding the tax rise on middle incomes, extending benefits for the long-term unemployed and suspending the immediate cuts in defence spending which would have been enforced automatically in the absence of an agreement. Worst of all, it defers the really tough decisions on spending. In fact, given how easily America’s rich can avoid taxes, it is likely that the tax rise which the President has fought so hard to impose on them will generate nowhere near enough revenue to pay for the increased unemployment benefits agreed at the same time. In other words, far from being a first step towards dealing with America’s deficit, this is a step back which will only make things worse.
To see how little has been resolved by this 11th hour deal, just look at Obama’s New Year taunt: “If Republicans think I will finish the job of deficit reduction through spending cuts alone […] they have got another thing coming”. In other words, the hard bargaining is still to come.
The whole mess is typical of America today, polarised between a Republican Party in which the moderates worried about their country’s fiscal position have been overwhelmed by gay-bashing creationist crackpots, and a Democratic Party determined to turn the clock back to the tax-a-little-and-spend-a-lot policies of Lyndon Johnson circa 1966.