The United States is rushing toward a fiscal cliff that could kill the recovery, thrust the world deeper into crisis and “hollow out” the US military, yet there is doubt lawmakers can veer away from the ledge.
For once, the problem is too little US government spending, not too much.
At the end of this year, if Congress does not act, billions-of-dollars worth of tax cuts will expire at the same time that automatic budget cuts hack $1.2 billion off government spending.
Taken together, the measures will trim an estimated $6.8 trillion off the US deficit over a decade.
That would be welcome, were it not for the scale and immediacy of the cuts, economists say.
Because of the weak state of the recovery, the reforms have the potential to be a devastating reprise of last summer’s debt fiasco — when, Washington’s gridlock resulted in the US losing its top credit rating and market confidence being served a haymaker.
Last week Federal Reserve Chairman Ben Bernanke implored Congress to get its act together.
“The size of the fiscal cliff is such that there is, I think, absolutely no chance that the Federal Reserve could or would have the ability whatsoever to offset that effect on the economy,” he said.
Bernanke’s fear is that a drastic reduction in government spending and a sizable tax hike would take much-needed stimulus out of the economy, at a time when growth remains weak.
Instead the chairman has adopted a two-pronged debt-cutting mantra: cut in the long-term fiscal without threatening the recovery in the short-term growth.
Equally, the bipartisan Committee for a Responsible Federal Budget has described the cuts as “extremely disruptive and unwise.”
Democratic Defense Secretary Leon Panetta has warned the “doomsday” reductions would hollow out the military and see $600 billion worth of cuts heaped on already planned cuts of $450 billion.
Republican budget maven Paul Ryan has called the cuts — know in the jargon as a “sequester” — as “inflexible” and “arbitrary.”
“There is no reason why we cannot work together to replace the sequester,” he recently remarked.
Cynics may argue there is one big reason: Congress.
For the last two years a divided legislature has been unable to pass much of significance.
And with six months to go until the presidential election, anyone would be forgiven for thinking that the business of governing has been permanently suspended.
The battle between President Barack Obama and his Republican challenger Mitt Romney has taken up much of Washington’s already limited attention span.
But all may not be lost, according to Keith Poole, a professor at the University of Georgia who has studied political polarization extensively.
“I think coming up to the edge of Niagara Falls in the row boat might finally force Congress and the President to do something,” he said.
According to Poole, the sheer size of the problem and the urgency with which it needs to be addressed may force consensus.
Until now Republicans have insisted that spending cuts are the only way to address the debt and Democrats have insisted on higher taxes for millionaires.
“The dirty truth is there is not much choice, you have to increase revenue and you have to cut spending,” said Poole.
He compares the situation to a previous period of hyper-partisanship before World War I, when passing an amendment to formalize income tax was a watershed for vitriol.
“However the elections come out they are actually going to have to do very meaningful budget reform, of taxation and entitlements,” he said.