When people warn that the United States is approaching a "fiscal cliff" it doesn't take much wit to realize it's not a holiday camp. But what is it and where, why is Uncle Sam whistling insouciantly as he hurtles toward it, and how might he avoid the high jump?
Well, clearly the U.S. federal government will go off the fiscal cliff of bankruptcy if it doesn't stop spending a trillion dollars a year more than it takes in, with a national debt already over 100% of GDP.
But the good news is, the specific cliff people are now warning about is smaller. The bad news is, it's nearer.
It's a complex set of ad hoc American federal tax increases and spending cuts totalling around $700 billion that will happen automatically on Dec. 31, 2012, for various reasons including the Budget Control Act of 2011.
Among them, an end to last year's temporary payroll tax cut will saddle workers with an extra 2% tax for Social Security, some Obamacare taxes will also kick in, and around $300-billion worth of Bush-era income, estate and capital gains tax cuts will end. Automatic spending cuts will hit over 1,000 government programs, including slashing nearly 1/10 of the defence budget. Doctors in medicare will take a 2% pay cut, and $50 billion in extended Unemployment Insurance Benefits will vanish.
In short, the U.S. faces a mind-bogglingly complex series of wrenching tax increases and spending cuts. And it faces them not because of a thoughtful, balanced attack on the deficit that offers a genuine return to fiscal sanity but because American politicians can't agree on such an attack.
The "fiscal cliff" didn't even come up during any of the three presidential debates. But it did send stock markets plunging on news of the same-old-deadlock election outcome.
Looking over this precipice to the larger one, it is fairly clear why a divided Congress, and divided executive and legislative branches, cannot find a reasonable solution. No, not that they're childishly mean-spirited idiots. But because they really don't agree on whether to lower spending or raise taxes, and even if they did, none dare do either deeply enough to help.
From the end of the Second World War until the Bush-inspired expansion of medicare to pharmaceuticals (Part D), then the financial crisis bailout, the U.S. federal government typically spent about 21% of GDP. Since then its share has shot up to 25%.
Republicans want to bring it back down and Democrats do not. But neither dare cut much into the social programs that account for two-thirds of non-interest spending nor raise taxes enough to fund them fully.
So they fiddle, kluge and stall. That's how the fiscal cliff got created and why the nation is liable to lurch over it.
Supposedly if it does, the combination of tax hikes and spending cuts will cut the deficit roughly in half. The Congressional Budget Office estimates these measures would reduce the deficit by $607 billion or about 4% of GDP by 2013. Which isn't enough especially given how big the debt already is, but may well be enough critically to impair America's ability to defend world order and Western civilization.
Meanwhile, free marketeers and Keynesians both think hiking taxes and cutting spending will hurt the economy (though they disagree about why), leading to less revenue and, oh dear, the deficit goes up again.
Alternatively, Congress could pass and the president could sign legislation postponing these measures, proving that even when they agree to spending cuts they're just kidding, then go back to bickering pointlessly while trillion-dollar deficits turn the United States into Greece on a continental scale.
Or they could really reform the welfare state. (Just kidding.)
Doing nothing is far and away the most likely course, especially now the 112th Congress is a "lame duck" lacking moral authority to take long-term measures it couldn't manage before election day, and the new one isn't sworn in until Jan. 3, shortly before the U.S. is expected to hit its current legal debt ceiling of $16.394 trillion, setting the stage for another bitter fruitless political fight.
So which fiscal cliff is the U.S. heading for? Probably both.