According to opinion polls, an overwhelming majority of Germans would have voted for President Obama on Election Day. Consequently, expectations about a constructive role for the US in global politics are high. From the perspective of most Europeans, one of the major challenges facing the United States and the world at large is economic growth. With the “fiscal cliff” looming large as this year draws to an end, fears about a possible US-recession in 2013 are at the center stage of debates about the second Obama-term. Will the Obama administration be able to negotiate a settlement with the Republicans to avoid the fiscal cliff before the year ends? Or will an „austerity bomb“ (Paul Krugman) hit the US economy with devastating effects for the global economy? Another important question is, how dangerous is the fiscal cliff to begin with? Is the fiscal cliff just a “constructed” crisis, with only small consequences for people´s lives, a matter of political rhetoric, or does it pose a real danger for society?
Both Europe and the US are facing major challenges associated with high budget deficits. The EU, whose Euro zone states share the same monetary policy, but each have vastly different economic and fiscal policies has only recently taken charge of coordinating a EU Zone wide common fiscal policy. It has largely been muddling through the fiscal and economic crisis, with signs of more integration and regulation now emerging, as the recently introduced regulations of the banking system in Europe shows. The US, on the other hand, has federal jurisdiction not only over monetary policy, but also over its national fiscal and economic policies. This control should make it easier for the US to cope with budget deficit problems. The problem, however, is political compromise, or rather the polarization of the debate, on economic and fiscal policies, in the American case that make compromising over this piece of legislation an arduous task.
Both parties agree that the reduction of the budget deficit should be a primary goal for the years to come. However, they disagree over the strategies on how to reach this goal. Unable to reach a settlement in 2011, law makers passed a Budget Control Act which stipulated that the Bush tax cuts would automatically expire by January 1, 2013, and, at the same time, vast, across the board spending cuts would take place. These would not only affect social policy programs such as Medicare and Social Security, but also federal unemployment benefits and tax brakes for renewable energy such as wind energy. Because of these drastic measures and program cuts (which could potentially be cut by half), the Congressional Budget Office and various economic experts expect the US to fall into a deep recession in 2013, with stock markets plummeting and global trade receding, if an agreement cannot be reached. Just this week, Christine Lagarde, president of the International Monetary Fund, warned that this crisis could be worse than the 2008-09 financial and economic crisis, or the Euro zone crisis.
From an analytic perspective, the problems associated with the fiscal cliff extend beyond fiscal and economic policy. Is political compromise still possible given the highly polarized post-election political culture?
At present, moving beyond the fiscal cliff is currently the key issue in negotiations between the President Obama and the speaker of the Republican controlled House, John Boehner. It is basically a two-man show (albeit with scant public statements by the two negotiators) with bargaining positions shaped by each party’s constituencies and election promises. In the public debate and in statements by other key players, economic advisors and policy makers, differences in economic philosophies and ideologies are pronounced. Republicans identify the budget deficit as major problem; after all, Republican presidential candidates ran on a platform to curb the budget deficit first, a position echoed by Congressional candidates in the November elections. This position is embedded in an anti-government philosophy as regulation and federal spending on social programs has been the target of much criticism among Tea Party movers as well as neoliberal Republicans. From their perspective, federal government is the root cause of the problem; spending should be cut substantially (with the exception of military spending), and the Bush tax cuts should be extended. House speaker Boehner faces pressure from the right to hold firm but there are several Republicans who have recently spoken out in favor of a more flexible approach. There is no doubt that the outcome of these negotiations will be an indicator of the strength of the right within the Republican Party.
Among Democrats, the debate has focused more on structural reforms of the tax system. While the President made it very clear that he would favor extending the tax cuts for the middle class while letting them expire for those earning more than $ 250.000 a year (which would mean a tax hike from the current rate of 35% to 39.6% for the wealthiest two percent of the population, a rate similar to that during the Clinton years), Republicans strongly oppose this tax proposal, which implies, compared to Europe, a rather modest model of progressive income tax. They instead call for the elimination of (so far not clearly defined) loopholes and deductions. Moreover, Democrats oppose many of the entitlement cuts included in the Budget Control Act of 2011 and favored by Republicans. Center-left economists, such as Paul Krugman, contend that the budget deficit is currently not really the central problem; rather, the goal of economic and fiscal policies should be to stimulate growth through government programs and target at reducing unemployment.
Interestingly enough, public opinion is clearly shifting in favor of President Obama and polling shows strong support for his position. According to a Wall Street Journal/NBC survey released on Wednesday this week, three-quarters of Americans say they would accept raising taxes on the wealthy to avoid the cliff. Even among Republicans, some 61 percent say they would accept tax increases on high earners. An ABC News-Washington Post poll released Tuesday indicted that nearly half of Americans approve of Obama’s handling of the negotiations versus a quarter of respondents who approved of Boehner’s. At the same time, Obama’s public opinion rating has reached about 54 percent in the Real Clear Politics polling average, above the level where it peaked in May 2011, when bin Laden was killed.
It is interesting to note that while both, Europe and the US, try to tackle the problem of economic growth and reducing national debt, Europeans focus less on tax policy and more on austerity and welfare state restructuring, whereas the US debate is framed as a debate about the role of government expenditures as such and stimulating growth through tax policies. Moreover, while the European debate is often confounded between the left and the right due to the complex, multilayered system of the EU, the current negotiations about the fiscal cliff show that the American debate has clear ideological underpinnings.