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

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Don't blame Jeremy Corbyn - polls show only Tory voters could have kept us in the EU

Despite deep divisions in the Labour Party, it's the Tory voters who let Remain down. 

The Labour Party was already having enough difficulty keeping itself together without a referendum on Britain’s membership of the European Union coming along. The party was reeling from the election of a leader who was not only well to the left of most of his parliamentary colleagues but also did not obviously have the personal skills needed to do the job. However, the referendum on the EU compounded the party’s difficulties by exposing another fissure - between its traditional white working class supporters and its public sector socially liberal middle class ones (including the vast bulk of its parliamentary party). In combination the two divisions threaten to tear the party part.

Elections in the UK are usually about the left and right of politics, whether the government should do a little more or a little less. On this Labour’s working and middle class supporters tend to be at one with each other. They all, albeit to varying degrees, want the state to do more, to curb the excesses of the capitalist market and produce more equitable outcomes. So long as political conflict focuses on this issue they are a viable electoral coalition.

However, the EU referendum was not about the size and the role of the British state. It was about what Britain’s relationship should be with an intergovernmental organisation that epitomises one of the major social and economic phenomena of our time, globalisation. This phenomenon has had significant economic and cultural consequences, including, not least, substantial flows of migrants in search of work in an internationalised labour market. 

Young graduates vs working class pensioners

Among young university graduates this development is regarded as an opportunity rather than a problem. It is the kind of world in which they have grown up. They have acquired the skills required to compete in the global market place. Indeed, they may well become migrants themselves, deploying their valued skills in Berlin or Barcelona. Meanwhile the experience of university, in which international students are often commonplace, has led them to embrace the cultural diversity that immigration brings.

This world looks very different to many an older white working class voter, who left school at the earliest possible opportunity. They are used to a world in which everyone speaks the same language and shares a common set of cultural values.  As a result, the relatively high levels of immigration that the UK has experienced in recent years is regarded as a threat. They want back the country in which they grew up and in which they once felt comfortable. Meanwhile, they suspect that the inflow of migrants helps explain why they have seen little if any increase in their living standards.

With questions of immigration and identity at its core, the referendum on Britain’s membership of the EU inevitably cut across Labour’s electoral coalition. Those with different educational experiences voted very differently. According to a large poll conducted on polling day by Lord Ashcroft, graduates and those still in education voted in favour of remaining in the EU by 59 per cent to 41 per cent, while those whose educational experience did not extend beyond secondary school voted by 65 per cent to 35 per cent to leave. Similarly, in their on the day exercise YouGov found that graduates voted in favour of Remain by 68 per cent to 32 per cent, while those whose highest qualification is a GCSE or its equivalent voted by 70 per cent to 30 per cent in favour of Leave. The party’s middle class supporters were in a very different place on this issue than their more working class ones.

White voters vs ethnic minorities

Just to compound Labour’s difficulties, there was a clear ethnic division in the referendum too. Those from an ethnic minority background, who have never shown much inclination to back UKIP, seemingly found the Leave side’s emphasis on reducing immigration relatively unattractive. Lord Ashcroft estimates that only 32 per cent of those from an ethnic minority background voted to Leave, compared with 53 per cent of those who regard themselves as ‘white’. Consequently, another part of Labour’s electoral coalition, Britain’s ethnic minority population, were also on the other side of the referendum divide from the party’s traditional white working class base.

Against this backdrop it was, in truth, hardly surprising that the highest level of support for Leave was in predominantly working class local authority areas in the North and Midlands of England where Labour tends to be relatively strong.  In the 2014 European Parliament election, Labour won on average 28 per cent of the vote in those local authority areas where less than 22 per cent have a degree, whereas the party won just 20 per cent in areas where more than 32 per cent are graduates. Now in the referendum, on average Leave won as much as 64 per cent of the vote in those places that fall into the former group, but as little as 42 per cent in the latter. A t the same time, no less than 71 of the 90 local authority areas in England and Wales with fewest graduates are in the North of England and the Midlands, whereas just 13 of the 83 areas with most graduates do so.

In short, the principal explanation for the fact that Leave did so well in the West Midlands (59 per cent), the East Midlands (59 per cent), the North East (58 per cent), and in Yorkshire & Humberside (58 per cent) in particular lies in the demography of Leave support and of those regions rather than in any particular failings on the part of the Labour party. Indeed, once we have taken the demographic character of an area into account, if anything Remain tended to do rather better the stronger Labour was locally. For example, amongst those council areas in England and Wales with relatively few graduates Leave won 62 per cent of the vote on average in places where Labour won over 25 per cent of the vote in 2014, compared with 67 per cent where Labour won less than 15 per cent.

Meanwhile, it was, of course, the other parts of its coalition, the socially liberal middle class and the country’s ethnic minority population, that ensured that London was the one part of England and Wales that did vote decisively in favour of remaining  (by 60 per cent to 40 per cent).  No less than 24 of the 33 council areas in the capital have a population in which over 32 per cent are graduates, while no less than 27 of the 41 most ethnically diverse parts of England and Wales are located in the capital. Again demography was crucial.

Corbyn not to blame

Against this backdrop it was hardly surprising that across Britain as a whole only around two-thirds (63 per cent according to Lord Ashcroft, 65 per cent as estimated by YouGov) of those who voted Labour in 2015 voted to remain in the EU. The party was never likely to achieve much more than this. And at least the party’s coalition did not fracture as badly as the one that backed David Cameron a year ago; well under half (42 per cent according to Lord Ashcroft, 39 per cent, YouGov) of those who voted Conservative in 2015 voted to remain. The real source of the Remain side’s difficulties was the failure of David Cameron to bring his own voters on board.

Yet it is Jeremy Corbyn who is taking the blame for the inside much of the Labour party for the Remain side’s failure, as the party’s pre-existing division about his leadership interacts with the division made manifest by the referendum. Of course, MPs are entitled to make their own judgement about Mr Corbyn’s capabilities for the job, a judgement that his performance in the referendum appears to have reinforced and which they may feel has become more pressing given that the outcome of the referendum makes an early general election more likely. But in truth there is little in the pattern of the results of the referendum to suggest that Mr Corbyn was personally responsible for Remain’s defeat. The referendum outcome looks more like a pretext for `an attempt to secure Mr Corbyn’s removal than a reason.

However, the referendum does raise questions for all wings of the Labour party, including above all its parliamentary party in which middle class graduates predominate. As we have argued before, unless the party can persuade the less well-off in Britain that social democracy can tame the tiger of globalised capitalism so that their interests and concerns – cultural as well as economic – can be met, it is at risk of losing their support. We have already in Scotland how the politics of identity can cause much of Labour’s working class support to melt away, and there is a risk that a similar politics could have the same effect in England should UKIP be able to sustain a post-referendum purpose and appeal. 

Certainly, there was little in the Remain side’s case – as espoused by Labour as well as the Conservatives – that met those concerns. There was, in truth, no answer on how to deal with immigration, while there was little attempt to explain how the UK’s membership of the EU could be used to advance the economic interests of the less well of. Instead the only reason offered for voting to remain was the allegedly deleterious consequences of leaving. Telling working class people that they have to put up with the consequences of globalisation is simply not good enough. Labour needs to take note – whoever leads it.
            
John Curtice is professor of politics at Strathclyde University and a columnist for IPPR’s journal Juncture