The US economy – fiscal cliff and debt ceiling

Sound and fury signifying nothing.

Proletarian writers

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Proletarian writers

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On 14 February 2011, Tom Crayton, an accountant from Sugar Land, Texas, posted on his firm’s website a comparison between the state of US government finances and an equivalent in household finances, by the simple device of removing eight zeros from the federal figures in order to bring them down to the level of a typical household.

These are his results, which relate to the US’s federal income, spending and indebtedness for 2010, as well as equivalent figures for 2012 (US and UK) added by ourselves.

US 2010

Tax revenue: $ 21,700.00

National budget: $ 38,200.00

New debt: $ 16,500.00

Total debt: $ 142,710.00

Recent budget cuts: $ 385.00

US 2012

Tax revenue: $ 24,500.00

National budget: $ 35,400.00

New debt: $10,900.00

Total debt: $ 161,000.00

Recent budget cuts: $ 590.00

This is the context behind the squabbling that has been taking place in the US between the Democrat and Republican parties over first the fiscal cliff, and now the raising of the debt ceiling. Were it not for the fact that the credit card companies appear still to be falling over themselves to extend more and more credit, the whole house of cards could hardly avoid collapse.

The fiscal cliff

The so-called ‘fiscal cliff’ that the US was in danger of falling over – which would, it is generally asserted, have had disastrous consequences for the economy of the whole world – arose as a result of the fact that a whole series of tax cuts and additional public-spending commitments that had been introduced by Ronald Reagan during his presidency had been legislatively accorded a time limit, after which taxes and public spending would return to previous levels. That time limit was 31 December 2012.

The reason why it would be so disastrous for the world economy that taxes would suddenly jump up while public spending was precipitously scaled back, with the savings used to reduce indebtedness, is that demand in the economy would be drastically cut, as a result of which the US would be in danger of being ‘plunged back into recession’. The amount involved is a mere $600bn, or, in ‘household’ terms, $6, yet there is a fear that the very mild recovery in economic growth that the US has been experiencing (a rate of 3.1 percent per annum in the third quarter of 2012) would be reversed, and that all hope for sustained economic recovery from the crisis would falter and die should that $600bn be withdrawn from the economy’s total demand.

Again removing the eight zeros for easy comprehension, the American household is divided on the question of how much of that $6 (if any) should be used to reduce the $161,000 indebtedness. Neither side is arguing that the US should carry on outspending its income.

Notwithstanding fragile signs of ‘recovery’ (ie, the slight increase in economic activity), the crisis has seriously attacked the living standards of the American working-class masses, including the better-off professional sections, and there is no way to a ‘recovery’ under conditions of capitalist rivalry without improving the competitiveness of American businesses – which implies, in the present circumstances, paring the wages bill and the tax bill to the bone.

All this causes anger and resentment among the working masses, and is slowly creating the conditions that will allow people to realise the absurdity of the capitalist system – which in turn will eventually create conditions that are favourable to overthrowing it. Although the masses in the imperialist countries have a long way to go before they are able to understand fully the need to overthrow capitalism and then to organise effectively to achieve this aim, overcoming the frenzied resistance of the ruling class, nevertheless the ruling class is anxious to retain working-class quiescence for as long as is humanly possible.

Hence Obama’s attempts to portray the US government (which is entirely an instrument of the super-rich) as being one which forces the super-rich to contribute their fair share to ‘national recovery’ through paying higher rates of tax on enormous incomes. Among the richest 2 percent of the population called upon to pay these higher rates of tax, however, the majority are petty-bourgeois rather than bourgeois, and they are dead afraid of losing the little privileges, the modest comforts and little luxuries, that put them ‘above’ the ordinary masses.

These are the typical supporters of the Tea Party and other groupings who demand that their incomes should remain untouched while the burdens of the crisis should be heaped on the working class. They are today the backbone of the Republican Party, which, in order to maintain its popularity among such people, is obliged to oppose Obama’s very modest, almost cosmetic, attempts to raise taxes on the rich.

This is why they held out to the very last minute reaching any agreement to avert the US falling over the so-called ‘cliff’. In the end, however, failure to reach agreement would have led to a worse situation for their petty-bourgeois constituency, so they did capitulate, again in the face of modest concessions on the part of the Democrats to their demands.

So what concretely was decided?

  1. Although taxes were increased, the increase was less than would have been the case in the absence of a deal.
  2. The top rate of tax was set at 39.6 percent (up from 35 percent), to be applied to households earning over $450,000 a year (rather than $250,000 a year as Obama had originally suggested). These households constitute the richest 1.5 percent of the population.
  3. A payroll tax cut that had benefited ordinary working-class people was allowed to expire. Overall the increase in tax revenue for 2013 will be $600bn, a large proportion of which will come from the payroll tax hike rather than from the rich.
  4. A provision was included in the deal that allows US multinationals not to pay taxes on income earned abroad (at a cost to the budget of $1.5bn). (see Kevin Zeese, ‘Fiscal cliff over, now the attack on the people begins’, Global Research, 2 January 2013)
  5. The jobless benefits for 2 million long-term unemployed, which would have expired and been lost immediately in the absence of agreement, have been extended – at least for the time being.

The main achievement of the agreement, however, is that it preserves illusions that are vital for the maintenance of the crisis-ridden system. Most important of all is the illusion that, with the right economic policy, a way out of the crisis can be found. Then come the illusions in bourgeois democracy and bourgeois politicians. The poor are encouraged to believe that the Democrats will look after their interests – after all, look how unemployment benefit has been saved and the rich have been forced to pay more tax! And the middle class have been encouraged to believe that the Republicans are looking out for them, preventing the Democrats from distributing their ‘hard-earned dollars’ among the ‘undeserving poor’.

The debt ceiling

It had been fully expected that the whole fiscal cliff scenario would be repeated in February, when the Democrat government was to be forced to ask the legislature to increase the amount it is allowed to borrow (the ‘debt ceiling’). As it happens, however, the Republicans, realising that they were losing public support in a big way as a result of their obduracy over the fiscal cliff, proposed putting back a decision on the debt ceiling to 19 May 2013, until when the US government will be authorised to continue to borrow as much as it needs.

However, on 1 March, budget cuts amounting to $69bn in discretionary spending that were agreed in 2012 will come into effect.

As in the case of the agreement averting the fiscal cliff, any bill to raise the debt ceiling, whenever the decision is finally taken, has to be passed by both the Senate (controlled by the Democrats) and the House of Representatives (controlled by the Republicans). If no agreement is reached, no bill can be passed, and the US government will be faced with the catastrophic situation of having run out of money to pay its debts as they fall due, leading to government employees being sent home en masse, and whatever services they are employed to provide being suspended.

As Richard McGregor pointed out in the Financial Times of 2 January 2013: “The fiscal cliff has been the dominant metaphor for the budget battle. But in reality, the two parties are moving from trench to trench to continue their warfare by other means.

In the meantime, despite the country’s bankruptcy, corporate profits have been rising steadily:

Paul Krugman tells us that “The American economy is still, by most measures, deeply depressed. But corporate profits are at a record high … profits have surged as a share of national income, while wages and other labour compensation are down. The pie isn’t growing the way it should – but capital is doing fine by grabbing an ever-larger slice at labour’s expense.”(‘Robots and robber barons’, New York Times, 10 December 2012)

As far as the UK is concerned, its finances are in almost as bad a shape as the US’s.

UK 2012

Tax revenue: £550,600,000,000

National budget: £676,600,000,000

New debt: £126,000,000,000

National debt: £1,111,400,000,000

Recent budget cuts: £10,800,000,000

UK 2012 minus 8 zeros

Tax revenue: £5,506.00

National budget: £6,766.00

New debt: £1,260.00

National debt: £11,114.00

Recent budget cuts: £108.00

Nevertheless, as a result of a serious fall in extractive-industry and manufacturing output, economists are predicting that the UK is heading for a triple-dip recession, after the fourth quarter of 2012 unexpectedly gave rise to a 0.3 percent fall in GDP as compared to the previous quarter.

Less GDP means that debt will tend to become higher as a proportion of GDP, even though the total amount of debt may be decreasing. This could well lead to a downgrading of the UK’s AAA credit rating, which would mean higher interest rates being charged on the country’s borrowing, and thus higher public expenditure to service the debt – paid for by increasingly severe cuts in services for the working class.

It is likely that 2013 will bring still further cataclysmic lurches in the world economy that cannot but intensify the hardships being suffered by working-class people throughout the world, as well as the latter’s resistance, and the repressive measures taken by bourgeois governments everywhere to curb that resistance.

We should never forget, however, that it is because of capitalism that workers have to suffer – not because there is a real shortage, but because we have produced too much of the means of subsistence in relation to what people are able to purchase. We should never forget that the workers of the world are producing more than is necessary for everybody to enjoy a decent standard of living, and, if given the opportunity, we are capable of producing still more.

Therefore, we should not feel any responsibility for the failing economies of the capitalist world. Instead, we should kick them out, along with the ruling classes who preserve them for their own parasitic benefit, and substitute socialist planned economies that are capable of meeting our material, intellectual and spiritual needs.