The "Fiscal Cliff" would drag America into certain recession

Congress must overcome its partisan rifts.

Irrespective of next week’s election, the fiscal challenges facing the next US government are vast. As the country races towards January’s “fiscal cliff”, the drumbeat warnings of recession have reached fever pitch, with partisan wrangling threatening to derail the sluggish US recovery.

Coming into effect at the dawn of 2013, the “fiscal cliff” represents the confluence of two events: a raft of spending cuts agreed as part of last year’s deal to raise the national debt ceiling and the expiration of Obama-backed extensions of tax breaks introduced in the Bush years.

The fiscal belt-tightening is expected to slash the deficit by almost $500bn – its steepest reduction since 1968. At 5.1 per cent, the rate is comparable to those experienced by Greece, Spain and Italy during their recent austerity drives.

Going over the cliff would almost surely plunge the US into recession, given the fragility of the economy. In May, the Congressional Budget Office warned of a 1.3 per cent contraction if action was not taken.  However, as the cliff looms, gloomier forecasts have predicted annual GDP contractions ranging from 3.6 per cent to 4 per cent.

According to a report issued by the National Association of Manufacturers (NAT), the fiscal shock would result in dramatic job losses of over 5 million by 2014, catapulting the rate of unemployment from the current rate of 7.8 per cent to 11 per cent by 2015.

Naturally, mass job losses and higher federal taxes would have severe effects on consumption. The report predicts that average disposable income is likely to fall annually by 8-10%, hitting the poorest hardest due to cuts in child tax credit and earned income tax credit.

Overall, mass unemployment, plummeting consumption and plaguing uncertainty is likely to weigh heavily on the US economy, stultifying its anaemic recovery unless drastic action is taken.

More pressingly, if Congress fails to raise the debt ceiling before the US hits its $16.4tn statutory debt limit – expected sometime between the election and the end of 2012 – the US would face default – a truly grim prospect. 

The NAT has reported that the approaching “fiscal cliff” has already shaved up to 0.6 per cent from US GDP this year alone, with the tense climate deterring businesses from investing and hiring.

As insecurity gathers momentum, an anti-debt lobby group “Campaign to Fix the Debt” has garnered the support of more than 80 CEOs – including figureheads from General Electric, Microsoft, UPS and JP Morgan – to pressure Congress into overcoming partisan deadlock to hammer out a solution.

But the prospect of this has so far looked bleak; both sides seek different solutions and both sides brook no argument over their staunch positions. One particular impasse stems from the Democrats’ drive to introduce tax cut extensions to all but the highest-earners, much to the chagrin of the Republican contingent. Likewise, Republicans want cuts to health and welfare, whilst Democrats are adverse to cuts in entitlement spending.

Just last summer, such “political brinkmanship” was cited by Standard and Poor’s in their downgrade of the US economy from AAA to AA+, as political wrangling overshadowed debate over the federal debt ceiling.

“We could have a recession in my view that is significantly greater than [anyone] is forecasting today, because it’s an indictment of our ability to govern”, said Dave Cote, leading member of Campaign to Fix the Debt.

Even the current political stalemate is conquered, extended tax cuts and deferred sequestration would hold their own economic perils. This path would only curtail the deficit by $90bn, contrary to the $500bn reduction if America does indeed “go over” the cliff.

Therein lies the trade-off: foster the recovery or confront the debt head-on. Most likely, following pleas from prominent economists such Federal Reserve chairman Ben Bernake, Congress will pursue a medium-term plan that privileges the recovery whilst tackling the debt, but time will only tell.

Overall though, inaction is most certainly not an option. The sudden jolt of the “fiscal cliff” could shock the economy into freefall, dragging the global economy down with it.

As the US stares into the abyss, Congress must – and most probably will – overcome its partisan fissures for the sake of America’s economic future.

Thus is the exigency of the times.

Clouds gather over Capitol Hill. Photo: Getty

Alex Ward is a London-based freelance journalist who has previously worked for the Times & the Press Association. Twitter: @alexward3000

Photo: André Spicer
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“It’s scary to do it again”: the five-year-old fined £150 for running a lemonade stand

Enforcement officers penalised a child selling home-made lemonade in the street. Her father tells the full story. 

It was a lively Saturday afternoon in east London’s Mile End. Groups of people streamed through residential streets on their way to a music festival in the local park; booming bass could be heard from the surrounding houses.

One five-year-old girl who lived in the area had an idea. She had been to her school’s summer fête recently and looked longingly at the stalls. She loved the idea of setting up her own stall, and today was a good day for it.

“She eventually came round to the idea of selling lemonade,” her father André Spicer tells me. So he and his daughter went to their local shop to buy some lemons. They mixed a few jugs of lemonade, the girl made a fetching A4 sign with some lemons drawn on it – 50p for a small cup, £1 for a large – and they carried a table from home to the end of their road. 

“People suddenly started coming up and buying stuff, pretty quickly, and they were very happy,” Spicer recalls. “People looked overjoyed at this cute little girl on the side of the road – community feel and all that sort of stuff.”

But the heart-warming scene was soon interrupted. After about half an hour of what Spicer describes as “brisk” trade – his daughter’s recipe secret was some mint and a little bit of cucumber, for a “bit of a British touch” – four enforcement officers came striding up to the stand.

Three were in uniform, and one was in plain clothes. One uniformed officer turned the camera on his vest on, and began reciting a legal script at the weeping five-year-old.

“You’re trading without a licence, pursuant to x, y, z act and blah dah dah dah, really going through a script,” Spicer tells me, saying they showed no compassion for his daughter. “This is my job, I’m doing it and that’s it, basically.”

The girl burst into tears the moment they arrived.

“Officials have some degree of intimidation. I’m a grown adult, so I wasn’t super intimidated, but I was a bit shocked,” says Spicer. “But my daughter was intimidated. She started crying straight away.”

As they continued to recite their legalese, her father picked her up to try to comfort her – but that didn’t stop the officers giving her stall a £150 fine and handing them a penalty notice. “TRADING WITHOUT LICENCE,” it screamed.


Picture: André Spicer

“She was crying and repeating, ‘I’ve done a bad thing’,” says Spicer. “As we walked home, I had to try and convince her that it wasn’t her, it wasn’t her fault. It wasn’t her who had done something bad.”

She cried all the way home, and it wasn’t until she watched her favourite film, Brave, that she calmed down. It was then that Spicer suggested next time they would “do it all correctly”, get a permit, and set up another stand.

“No, I don’t want to, it’s a bit scary to do it again,” she replied. Her father hopes that “she’ll be able to get over it”, and that her enterprising spirit will return.

The Council has since apologised and cancelled the fine, and called on its officials to “show common sense and to use their powers sensibly”.

But Spicer felt “there’s a bigger principle here”, and wrote a piece for the Telegraph arguing that children in modern Britain are too restricted.

He would “absolutely” encourage his daughter to set up another stall, and “I’d encourage other people to go and do it as well. It’s a great way to spend a bit of time with the kids in the holidays, and they might learn something.”

A fitting reminder of the great life lesson: when life gives you a fixed penalty notice, make lemonade.

Anoosh Chakelian is senior writer at the New Statesman.