Almost a month after the historic day President Barack Obama convincingly won re-election, there’s good news and bad news out of Washington regarding the so-called "fiscal cliff" talks.
The good news is, as yours truly outlined earlier, is that the so-called fiscal cliff is really a fiscal slope because: 1) no deep spending cuts to U.S. Department of Defense and non-defense programs are likely to occur on Jan. 1, or on Feb. 1, for that matter; and 2) the IRS probably will not immediately on Jan. 1 adjust income tax tables that determine taxes withheld for employees. In other words, major damage to the financial markets, the U.S. economy, and most importantly, to U.S. citizens and to people around the world, will not occur, if the two sides can reach a budget deal by roughly Feb. 1.
The bad news is, if the present negotiations trend continues -- it’s really a “non-negotiations trend” -- no budget deal will occur because of a condition the people imposed on Washington: divided government.
Divided Government: Not Another ‘Check And Balance’
Simply, divided government, where one party controls the executive branch and another party controls the legislative, leads to gridlock, or paralysis -- an inability to address issues and problems facing the nation.
A significant portion of the U.S. electorate -- certainly many members of the very conservative, anti-tax tea party faction of the Republican Party -- and selected investors argue that divided government is good for the financial markets, the U.S. economy, and the nation as whole, as it can "prevent Washington from doing anything," which many of these Americans view as a plus. For these U.S. citizens, absent a condition in which their party controls both the White House and the Congress, gridlock is better than compromising and reaching a budget deal that contains policies they oppose, including liberal social welfare state programs.
The outcome of gridlock -- if no budget deal can be reached by, say, March 1 or April 1 – is another, needless shockwave to the stock and bond markets, and the U.S. economy. Moreover, that shockwave would occur at a time when the markets would most certainly not welcome it. U.S. and global financial markets are still in the process of recovering from the acute stage (2008-2009) of the financial crisis, and another possible downgrade of the U.S.’s credit rating would be another, needless political and economic calamity. Credit markets would tighten, and investor confidence would be jolted, probably resulting in a slowing of both the U.S. and global economies, or even worse economic damage.
Now, the typical, moderate, independent American, assessing the damage that a long-term failure to reach a budget deal would cause, will no doubt reasonably argue that surely the tea party faction will compromise -- for the good of the nation. Such a compromise might follow Obama’s first proposal to resolve the fiscal crisis: Income tax rates for families with more than $250,000 in annual income and singles over $200,000 would return to their pre-Bush levels, and the debt ceiling would be increased, in exchange for Obama and the Democrats compromising on cuts in entitlement spending (primarily cuts in Social Security, Medicare, and Medicaid), among other spending cuts.
Tea Party Faction: Epitome Of Obstruction
Unfortunately, however, if that independent American is thinking reasonably and views a compromise as a rational, prudent stance, he/she is not thinking like a tea party member of Congress. Pressured by their extremist supporters, tea party members of Congress have shown no inclination to compromise and agree to a fair deal, no matter how much damage that obstruction and intransigence causes to the credit markets and the U.S. and global economies. Obstruction, driven by an extremist conservative ideology -- no matter how much financial and economic destruction it triggers -- has been the tea party’s preferred strategy, if the alternative is a compromise that leads to increased income taxes and includes support for the liberal social safety net.
Moreover, the evidence of obstruction is overwhelming. Consider:
-The tea party obstructed and opposed Obama’s jobs bill that would have injected at least $500 billion more in Keynesian economic stimulus into the economy - an act that would have created millions of infrastructure and spinoff jobs, and substantially lowered the unemployment rate.
-The tea party has opposed passing an extension of the 2001-2003 Bush income tax cuts for 98 percent of the American people, which the Democratic-led U.S. Senate approved earlier in 2012, because voting for it would not have extended those tax cuts for upper-income and uber-rich Americans, and because it would have meant being party to a deal with Obama and the congressional Democrats.
-And most egregiously, the tea party obstructed and held the nation hostage in the summer of 2011 during the debt ceiling negotiations. The faction made its support for a debt ceiling increase contingent on dollar-for-dollar cuts in federal spending - and its obstruction and delay triggered the unprecedented: the first downgrading of the U.S.’s credit rating in our nation’s history. And, incredibly, most recently, Senate Minority Leader Mitch McConnell, R-Ky., has boasted that Republicans could hold the nation hostage again with the debt ceiling!
Clearly, obstruction and a willingness to say “No” to any deal containing liberal policies, even if it damages the U.S. economy, increases unemployment and triggers a U.S. credit downgrade, is not exactly thinking reasonably and viewing compromise as a rational, prudent stance.
Obama And The Dems: Ideological, Too
To be sure, the above is not to state that Obama and the Democrats have not been ideological or liberal: they have been. Liberal Democrats worked for and enacted the biggest social safety net change in the nation’s history since the passage of Medicare, the health insurance program for senior citizens, in 1965: the 2010 U.S. Affordable Care Act, commonly known as Obamacare, that will achieve universal health care coverage in the United States. It is a liberal, social welfare state program that asks the rich and upper-income groups to help subsidize the health insurance of the poor, the working poor, and others. And of course, Obama and congressional Democrats passed the more than $786 billion economic stimulus package, and other interventionist programs, in 2009, to help end the Great Recession and stabilize the banking system. Without question, Obama and congressional Democrats have passed several liberal programs. Clearly, to say that liberals in Congress and the nation’s chief executive have not been ideological and have not contributed to gridlock would be inaccurate.
But the liberal programs of Obama and congressional Democrats hardly blot out the obstruction and intransigence of the extremist tea party faction.
The Divide: An Insurmountable Gap?
The Democratic stance also underscores the ideological canyon (is it an insurmountable gap?) - between the two major parties.
The gap may be insurmountable because the divide is not merely between “one party that favors a legitimate social safety net and the other party that favors a minimal social safety net.” If only the divide were that small! It isn’t. Consider this:
Based on their policy stances to date, tea party members believe the proper role of the federal government is: 1) national defense and 2) the enforcement of contracts. After that, support for what Americans and public officials call a modern government, including the regulatory state, gets little support in tea party circles. Even less support exists for the social safety net. Incredibly, even less tea party support exists for progressive taxation. Some tea party members would also favor the abolition of the federal income tax. Others would even try to dismantle the U.S. Federal Reserve - a far-fetched policy proposal discredited by most economists and public policy professionals decades ago. And there is almost no support in tea party circles for the positive state: the demonstrated ability of the federal government to create jobs, improve Americans’ quality of life, and to reduce human suffering.
In other words, the ideological divide between the Democratic Party and the tea party-dominated Republican Party is enormous.
The optimist, perhaps that typical, moderate, independent American, would argue, there’s always a chance - a hope, really - that each side will identify common ground, compromise on those issues where there are major differences concerning what is the correct policy, and reach a budget deal that’s in the interest of the entire nation.
The realist would counter that the ideological gap is too wide - the Democratic Party favors a liberal social safety net and an activist government, the tea party-dominated Republican Party favors a minimalist government - and that any budget deal must wait until the American people elect a super-majority of one party in Congress and a same-party president.
Obviously that potential, unified government is years away, and U.S. and global financial markets will not wait that long.
Some days yours truly wakes up and he sees data points that suggest the United States will pay the price of a divided government; other days he wakes up and sees a compromise serving as the solution, until unified government is achieved.
Joseph Lazzaro, U.S. Editor, served as Managing Editor of New York-based financial news web sites WallStreetEurope.com/WallStreetItalia.com, 1999-2004, and as Economics...