Fear can pave the way to avoid the “financial cliff”

I haven’t blogged much lately, in fact, very little since the November 6 elections. I needed a break, and I hope you haven’t missed me too much. In any case, I am back with the goal of writing more about issues beyond politics and the political quagmire here in Washington.

My blog posting yesterday about the death of jazz legend, Dave Brubeck, was part of that effort, and I hope to continue so. But, first, I must write about the “financial cliff” – the financial Armageddon that looms at the end of the year if the White House and Congress cannot agree on a new approach on how to solve America’s serious financial problems and growing national debt.

It’s already a month since President Barack Obama’s convincing victory over the Republican challenger Mitt Romney. The Republicans are still trying to come to terms with what actually happened and why. Meanwhile, all eyes in Washington have been focused on the “fiscal cliff,” by some called the “austerity crisis,” a matter of seldom seen proportions and seldom seen consequences if not dealt with before the New Year. If the White House and Congress cannot come to an agreement, a series of automatic events – all extremely negative — will unfold, both on taxes and on budget cuts.

The financial cliff came about because of previous failures in Washington after the big debt ceiling crisis of 2011 to lower the budget deficit and the national debt. The parties decided to postpone the tough decisions – kick the can down the road, as it is so often put. So, no one imposed the cliff on Washington – the politicians did it this to themselves, and they will go down together if there is no deal before December 31, although polls show that most voters will blame the Republicans.

If there is no deal, all American will see their taxes go up next year — by an average of 3 446 dollars. In addition, 200 billion dollars in tough spending cuts will take effect. A non-deal will cause the U.S. economy to shrink and unemployment to turn upwards, to over 9 percent. That would be not only a shame, it would be catastrophic for an economy that now shows encouraging signs of steady improvement, including steadily lower unemployment figures – to now 7.7 percent, the lowest since December 2008, just before Obama entered the White House.

Indeed, it’s a frightening scenario, and, for many, it seems incomprehensible that the White House and Congress will let this happen. Too much is at stake, both politically for the parties, and economically for the whole country. No one wants to be blamed for such a collapse and common sense says that there will be a deal. But time is rapidly running out in this “magic moment,” for a deal, as a leading Democrat put it recently. There is no better time than right now to make a deal.

So far, the Republicans have resisted the “balanced approach” — with tax rate hikes for the richest two percent of the population, those with incomes of over 250,000 dollars per year, combined with a series of spending cuts – an approach on which Obama campaigned and won the election. Stubbornly, the Republicans have so far said no to all tax rate hikes, but without them, Obama has repeatedly and firmly stated, there will be no deal.

During the election campaign, the majority of voters seemed to think that Obama’s “balanced approach” was sensible, and those sentiments linger. The President’s approval ratings are up, over 50 percent, and he is now clearly in the driver’s seat.

Maybe, in the end, plain fear of a failure and the subsequent wrath of the voters, who want a deal and want Washington to come together, will drive the parties together to reach an agreement. There have been cracks in the unified resistance among the Republicans in Congress to higher taxes. No doubt they see the writing on the wall.

If the Republicans don’t meet Obama partway, they “would contribute to a recession that would discredit them for a decade,” David Brooks warns in the New York Times today.

Fear… fine! Who cares? The main thing is that there is a deal before midnight strikes on December 31.

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What now after the Supercommittee’s super fiasco?

The failure of the Supercommittee to reach an agreement is a super fiasco, but was the task of the twelve committee members doomed for failure from the start?

In the highly partisan atmosphere of Washington, it’s hard to conclude anything else. Not even the threat of sequestration at the sum of 1.2 trillion dollars starting January 2013 was enough of a threat to make a dent in the entrenched positions centering around the Republicans’ resistance to accept a balanced approach, paid for by both cuts and higher taxes for the richest in this country.

For next year, election year, there is no reason to believe that the deep ideological divisions between Democrats and Republicans will dissipate. On the contrary, they will probably deepen even further, which, in turn, will mean that the political paralysis in Washington continues.

That’s a most depressing outlook for America for it means that anything to stimulate today’s depressed economy is likely doomed to fail and that the fate of the country now lies in automatic budget cuts in domestic and military programs triggered by the fiasco of the Supercommittee.

Is there a silver lining in this fiasco? Washington Post economic columnist and blogger Ezra Klein, citing the Center on Budget and Policy Priorities, writes:

“If Congress simply does nothing for the next few years, the fiscal picture will improve by about $7.1 trillion over the next ten years. About $4 trillion of that is the expiration of the Bush tax cuts” (from 2001 and 2003).

But that’s no way to run a country and neither party likes such an outcome for various reasons. The Republicans want all the tax cuts to be permanent and they are deeply worried about looming automatic defense cuts and will try to work around them. But President Obama, urging Congress to keep going, also promised to veto any end runs. There are “no easy off-ramps,” he said. The Democrats also need a debt deal but don’t want the tax cuts to expire for the middle class. So both sides should be interested in continuing to negotiate.

Instead, the blame game between Democrats and Republicans is now on. It remains to be seen which vision of America the voters will believe – it will decide next year’s elections. And maybe that’s what they all want?

Deadlock on debt ceiling continues in Washington

The politicians in Washington have not been able to compromise, at least not yet, and their failure has brought America to the abyss just a week before August 2, when the debt ceiling must be raised so that the U.S. government will not default and be forced to cancel its payments.

Despite long and intense negotiations, the parties are still far apart. Last Friday, the House of Representatives Republican President John Boehner left the negotiating table for the second time, and an angry, almost bitter President wondered whether the Republicans can say “yes” to anything.

Unsuccessful negotiations continued during the weekend between party leaders in Congress, and today, the Democrat leader in the Senate Harry Reid and the Republican Speaker John Boehner presented separate proposals as solutions to the crisis. But the two proposals differ substantially, and the chances for reconciliation and compromise seem minimal even though Ezra Klein in his Washington Post blog outlines a possible way for the two sides to come together.

Meanwhile, the impasse continues and the uncertainty and anxiety have increased noticeably in recent days. The world’s stock markets today reacted negatively to the deadlock in Washington, and tonight, President Obama addresses the nation, underlining how serious the situation is, although everyone stills says that the debt ceiling will be raised.

But how, when each side consistently trashes the other’s proposals, and when ideology consistently trumps good sense and pragmatism?

The inconceivable — that the world’s largest economy with AAA rating could soon be unable to pay its debts — can no longer be excluded.

Spending too much, taxing too little

The discussions continue, new proposals are floated, old ones are revived, but there is still no agreement while the deadline, August 2, is rapidly approaching when the U.S. can no longer pay its expenses without the debt ceiling being raised.

Lots of talk about a balanced solution, about spending and cuts and taxes. What is then the state of the U.S. economy? Has the U.S. spent too much? Are taxes too low? These are questions that Factcheck.org. tries to answer in a recent study.

Here are some excerpts:

 U.S. federal spending is the highest since World War II, while incomes are the lowest in more than 60 years. In figures this means that spending represents 24 percent of GDP, while the federal revenues dropped to 15 percent of GDP.

 This has resulted in a budget deficit of 10 percent of GDP, the largest deficit since 1945.

 Tax cuts and America’s wars in Iraq and Afghanistan are the reasons behind the large deficit.

 Federal income tax receipts have dropped sharply since the tax cuts under George W. Bush, from 10 percent of GDP to 6 percent today.

 Today, the U.S. borrows 36 cents of every dollar spent.

 Of federal spending, 20 percent goes to Social Security, 13 percent to Medicare, and 8 percent to Medicaid, while 20 percent goes to defense. Foreign aid accounts for only 0.9 percent of total federal spending.

All this points to a serious imbalance in the U.S. economy. How, if at all, can Washington solve this problem? That is today’s big question.

Minnesota has closed — is the U.S. next?

That which now threatens the entire United States, has already happened in Minnesota.

The State closed its institutions on July 1, in the middle of tourist season, after the Democratic governor Mark Dayton and the State Legislature, controlled by Republicans, failed to agree on a budget.

What has happened to good old Minnesota, the most Scandinavian in all of America?

“Search America from sea to sea and you will not find a state that has offered as a close a model to the idea of a successful society as Minnesota,” wrote Neal R. Peirce and Jerry Hagstrom once in their excellent The Book of America.

Today, the situation is unfortunately another. Two of the leading and most conservative Republican presidential candidate, Michele Bachmann and Tim Pawlenty, both come from Minnesota. Republicans control both houses of its Congress. The old progressive political tradition, personified by Hubert Humphrey and Walter Mondale,  is a distant memory. Mondale and former Republican Governor Arne Carlson’s attempt to mediate in the current crisis has been in vain.

Minnesota’s future is at stake, says Governor of Dayton in a speech, reproduced on the Daily Kos. And the local newspaper Winona Daily News blames the Republicans who say no to everything, especially to all proposals about raising the taxes, even for those earning over a million dollars a year.

Sounds familiar?

Yes, the same battle goes on here in Washington, between a Democratic President and a House of Representative dominated by the Republicans, who have so far rejected all proposals on closing tax loopholes or raising taxes for the wealthy down the line. This ‘no’ has until now put an end to all of President Obama’s attempts to find a balanced compromise to today’s severe economic crisis.

On August 2, the United States may be forced to close and after daily but fruitless negotiations since last Sunday, pessimism is rising. All parties still proclaim that no one wants America to default on its debt, but the road ahead is still long and difficult, and the outcome is still highly uncertain.

Debt ceiling reached — tough talks await

America officially hit the debt ceiling yesterday, 14 300 billion dollars, but we did not notice much. Everything feels pretty much the same as before, gasoline costs over four dollars a gallon, food and household products are more expensive, the stock market is a bit nervous and has declined, but there is no panic – the roof has not fallen in.

However, behind the scenes, warnings are being heard. Treasury Secretary Tim Geithner has talked about a catastrophe not only for the U.S. economy but for the whole world economy unless Congress decides to raise the debt ceiling. The deadline is August 2 – after that the U.S. would have to suspend all its payments.

Normally, an increase in the debt ceiling is pretty much routine. Congress has raised the debt ceiling of 78 times since 1960, according to the New York Times, as much as 18 times during Ronald Reagan’s eight years in the White House alone, and despite the fact that politics often entered into the decision. Such is the case this year – a lot of politics.

Republicans demand budget cuts – see Speaker John Boehner’s proposal of 2,000 billion dollars in cuts and no tax increases — if they are to approve raising the debt ceiling. Unacceptable, the Democrats have responded. That’s where we stand today even though everyone knows that there really is no choice – the debt ceiling must be raised.

Despite the warning signals there is confidence that some form of settlement will be reached. The question is whether it will be a comprehensive agreement, which includes an agreement on next year’s budget, or if it will be a narrower, perhaps even temporary, agreement. Tough negotiations await, perhaps all the way until just before the deadline on August 2.