So, they've averted the 'fiscal cliff,' at least for a while. Yes, the deal between the Republicans and President Obama's democrats mean that taxes will rise for some of the richer Americans and that spending cuts will now not take place, at least for a while. Housing prices have started to increase, indicating that the supply of homes and the demand for them is finally starting to balance out. Losses at the wallboard makers who report their results (only USG and Eagle Materials in the US - all others are privately owned) have been staunched and there is even talk of an increase in prices. Time to break open the champagne? Not quite yet... there's still trouble ahead.
The tax rises (up from 35% to 39.6% for those earning over US$400,000) will bring in around US$600bn over ten years (presuming that the taxes stay at that level for the full decade). That's a useful sum - a few hundred billion here and a few hundred billion there and pretty soon you're talking about real money. Taxes under this deal did not rise for 98% of Americans, although the ending of a reduced payroll tax rate meant that every earner will be paying more - a total of US$120bn per year more.
The deal struck also delayed for two months the threat of cuts to Federal government expenditure, but the 'sequester' - equal to US$120bn of cuts - is still hanging over the politicians' heads, like a modern-day sword of Damocles.
Added to the 'sequester' is another potential swamp on the horizon for the politicians to flounder through - the impending Federal Debt Ceiling. America, in its wisdom, has decreed that the government cannot spend more than the Treasury can borrow - with the maximum amount set by Congress. Once the debt ceiling is reached, the government has to lay-off its workers and shut-up shop. You may recall that we have been in this situation before, in mid-2011, when the Republicans forced President Obama to agree to a ten-year package of spending cuts. That impasse led, partly, to one of the ratings agencies decreasing America's credit rating by a notch. In February 2013, the US government will have spent its way up to its previously negotiated debt ceiling of US$16.4tr (yes, trillion). The Republicans, once again, have drawn a line in the sand: 'More cuts to Federal spending or no deal on the debt ceiling.'
Given the amount of ill-feeling and bitterness that has been generated between the parties over the last few years, there is no hope that the new debt ceiling negotiations will pass off without incident. More drama, more turmoil and probably more de-ratings by the credit agencies. Who is to blame for this mess?
Oddly enough, I partly blame the Greeks. It was they, I believe, that came up with the concept of democracy some 2500 years ago. Democracy, the power of the people, is where everyone has a say in the decisions that affect their lives. It seems like a good idea, in theory. However, in practice, human nature comes into play to warp the outcome of democratic states.
Who likes to pay more taxes? Not me and not you. No-one likes to pay more taxes, especially when we see the amount that governments waste on our behalf.
Who wants to have good centrally-provided services, like defence, education, health care, a clean environment and all the rest? I do! I bet you do too.
So, we have a bizarre conundrum at the centre of democratic states: everyone wants to pay lower taxes (and ideally no taxes) but at the same time, we want the government to take care of everything. That's impossible. If the budget isn't balanced, the debt will increase (the central banks of China, Japan, Brazil, Taiwan, UK, Switzerland and Russia are the largest holders of US debt: foreigners hold 32% of the overall total).
However, politicians promise that we can have it all - lower taxes and more services - and we continue to elect the ones who promise the most. If a prospective nominee stood up and told us that if we want lower taxes, we are going to have to expect less of the government (in other words, big cuts), they probably wouldn't get elected - telling the truth like that is electoral suicide. We get the politicians we elect and deserve, and send them off to fight impossible fights and we're disappointed when they fail to deliver. But they can't deliver on their promises.
So while I partly blame the Greeks, I think that the blame for this mess also lies with us.
