By Anatole Kaletsky
Jan 2 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
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
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.