A Leisurely Stroll Along The Fiscal Cliff

During the Cold War, the peace was kept by a doctrine accepted by both sides called MAD – Mutually Assured Destruction. Both sides knew that if nuclear war broke out that they would not survive it. It was hardly a sane way of ensuring that humanity did not extinguish itself, but it abided until the Soviet Union imploded and (largely) the communist ideology surrendered to capitalism. Whilst I wouldn’t suggest that the parallel between the USA and the Soviet Union is an exact analogy of the ideological gulf between the Democrats and the Republicans, the Fiscal Cliff facing them can be thought of as an economic version of MAD.

The USA nearly ran out of money in the summer of 2011 as Republicans and Democrats argued over the conditions needed before they could agree a temporary hike in the US debt ceiling. The impasse was settled at the 11th hour and part of the compromise was to establish a Fiscal Cliff – that unless agreement could be arrived at something like $600 billion would be amputated from government expenditures through the discontinuance of certain tax benefits and mandatory spending cuts on New Year’s Day 2013.

Discussions between President Obama and Republican House of Representatives Speaker John Boehner are on-going. The President has softened an earlier position that called for tax rises for those earning over $25000 a year and the new figure is $400000 PA. The Republicans are insisting that tax rises be excluded for anybody earning under the $100000 mark, but have offered to close tax loop holes. They would accept increased tax revenues up to $1 trillion (over 10 years) if they are matched with spending cuts – they’d even throw in a hike to the debt ceiling which would ensure that the government if funded for a further year.

It looks like the brinkmanship is set to continue well into the season of goodwill towards all men, but surely neither Republican or Democrat would countenance economic MAD which would plunge the US economy into recession and push the world into an economic nuclear winter – would they?