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America on the edge of a fiscal cliff

By Brendon O'Connor - posted Wednesday, 14 November 2012


Barack Obama ended his victory speech in Chicago with the words: "And together, with your help and God's grace, we will continue our journey forward and remind the world why it is that we live in the greatest nation on earth." These words will ring hollow unless American politicians can work out how a Democratic President can negotiate lasting deals with a Republican-controlled House of Representatives.

In the short term, the opportunity for compromise is better on economic matters than it has been for years. At the end of this year, the George W Bush tax cuts will expire. Obama will not wish to see this happen, as they contain cuts to middle-income taxpayers that he has promised to keep. However, Obama will want to see the top marginal tax rate for people earning over $390,000 to increase from 35% to the high 30s. Without a deal, the rate will default back to 39.6%, the same rate that was in place for the Clinton presidency which paid off the debts of the Reagan Administration and enjoyed impressive economic growth in the mid-to-late 1990s.

These taxation options should have been one of the key issues of the presidential campaign, setting up Obama's more Keynesian approach against a pitch for Reaganomics. This seemed for most of the year the type of campaign promised by Romney. However, it never really happened because both campaigns focused on clichés and ground-game while the media frequently forgot to ask either Obama or Romney to explain their tax plans. Romney also moderated his position over time on taxation (as he did towards the end of the campaign on a number of issues, making him once again appear to be the "multiple choice" candidate, a label that Edward Kennedy first used for Romney in 1994). Most shameful was Romney's secret plan on tax reform where he pledged to not increase taxes for the wealthiest Americans. Instead, he would close loopholes and deductions to fund the revenue that would have come from ending the Bush era tax cuts.

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This sounded too good to be true, and it was. The actual loopholes and deductions were never named and on that basis alone Romney deserved to be defeated for keeping a central policy secret from the voting public. He also deserved to lose because of the multiple positions he took on a variety of policy issues: of course the GOP primaries make it hard to not tack to the right and then have to tack back to the centre; however, Romney's reversals went beyond canny political sailing and entered into a more cynical realm of "I hope the public ignores what I said earlier this year (or month) on this issue." Consistency in politics has to mean something, or we might as well choose politicians via a lottery.

The other big economic issue looming is the fiscal cliff that America is set to go over in early 2013, unless a deal can be reached between the president and the congress on spending cuts. If no deal is reached, automatic cuts that few politicians really want will come into action.

Washington's politicians are involved in a game of policy chicken that could have devastating results not only for America - but for the world. The Republican proposals outlined in the Paul Ryan budget plan are not going to be acceptable to the President, particularly cuts to programs affecting the poorest and most vulnerable Americans. Ryan's idea of vouchers is also unlikely to have any Democratic party takers. Ryan's best idea is means testing retirement and medical benefits; the Democrats seem wary of this idea, presumably because it could be the beginning of a move to fully privatise Social Security and medical coverage for Americans.

These proposals raise interesting philosophical questions about whether universal or progressive benefits for the elderly are desirable. On the basis of both cost and coverage, a more universal public health system coupled with means-tested retirement benefits is the road ahead that American politicians should consider. However, only incremental changes on these crucial issues are likely in Obama's second term.

The only American politician I saw who put detailed and well thought out economic policies at the forefront of their campaign was Elizabeth Warren in her successful Senate campaign in Massachusetts. Warren, a Harvard Professor, is an expert on the financial problems experienced by Americans who have been bankrupted by their medical bills or mortgage payments. Debates in the US Congress could do with input from just such a policy expert as Warren. Her questioning of Treasury Secretary Tim Geithner in a Congressional inquiry over where the $170 billion the US government gave AIG went is a rare moment of pushback and inquiry into the world of high finance.

On the campaign trail, Warren - unlike Obama - talked frequently about inequality, often quoting studies. She argued convincingly that the Republican economic approach inspired by the Reagan Administration of trickle down tax policy, deregulation, deindustrialisation, and limited government had failed. Obama talked about economic fairness in a much less direct manner, leaving what he would do to address inequality very open to conjecture. In terms of extending Obamacare to more seriously reduce America's incredibly high health costs - the highest in the OECD by a considerable margin - Warren has crunched the numbers to find that the public system is much more cost efficient, contradicting Romney's faith-based comment in the first presidential debate that the private system does better than the public in health care delivery. With nearly 19% of American GDP being spent on healthcare, addressing the health care cost blowout is crucial to America maintaining its status as a global super power. That might sound dramatic but health expenditure is not a great way of stimulating growth in the economy – this money could be spent more wisely elsewhere. Furthermore, the government is paying far too much for services because of the role of insurance companies in inflating costs, massive inefficiencies in having so many separate providers, and over servicing from doctors who are often overpaid.

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If the second Obama term is to deliver on economic matters, these big questions need to be addressed and outlined more directly, not only in the broad economic philosophy favoured by his administration, but also by concretely addressing more specific issues like how best to keep medical costs under control. My concern is that for all of Obama's reputation as a visionary president, he has so far in fact been a status quo president who has often been too lost in the details of events to argue for bold new policies.

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This article was first published on The Conversation last Friday.



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About the Author

Brendon O'Connor is an Associate Professor in the US Studies Centre at the University of Sydney and is the 2008 Australia Scholar at the Woodrow Wilson International Center for Scholars in Washington DC. He is the editor of seven books on anti-Americanism and has also published articles and books on American welfare policy, presidential politics, US foreign policy, and Australian-American relations.

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