The US had enjoyed a period of relative peace and tranquillity during the presidency of Bill Clinton. There were no major armed conflicts in which the US got embroiled. Ethnic cleansing in the Balkans and the genocide in Rwanda however were too brutal to have been ignored. The US joined Europe in bringing the conflicts to an end. Peace and non-involvement in warfare helped the US economy to grow at an unprecedented rate. There was negligible national debt when President Clinton ended his second term. George Bush inherited a very healthy economy and decided to grant relief to the people. He introduced significant tax reductions, known as the Bush tax cut, across the board, including millionaires and billionaires. The Democrats in Congress opposed the measure but finally agreed to limit the tax cut for nine years. During the second term, the economy fell into a recession and the Bush administration approved multiple bailout packages. Cash incentives were also provided in order to allow people to have more liquidity to buy essentials. National debt at the end of 2008 reached $ 10.5 trillion.
President Obama took office at a time when the economy was in the midst of recession. Unemployment was above nine percent; housing was under threat of foreclosures; millions lost their homes; trade deficits increased; a number of banks and airlines applied for bankruptcy; auto industries were on the brink of shutdown; wars in Iraq and Afghanistan had already cost more than $ 600 billion; the military was overstretched and needed more resources. Almost 37 million people were on food stamps costing the government over $ 1.2 billion per month. In these circumstances, the Bush tax cut ended in 2010. Given the extremely difficult economic situation, President Obama extended the tax cut for another two years. The progressives amongst the Democrats opposed the measure on the ground that the tax cut had provided disproportionately high benefits to the wealthy. The administration granted $ 600 billion to selected banks with ‘zero interest’ to extend loans to homeowners threatened by foreclosures. The Bank of America, one of the intermediaries to address foreclosures, returned the amount to the treasury after making windfall profits. There were complaints that not enough was done to assist beleaguered homeowners. Another bailout package was offered to AIG. The AIG executives took full advantage of it, collected millions as bonus, and some of them even left the country. The auto industries made use of the package and turned GM, Ford and Chevrolet into business again. The decline in tax revenue and disbursement of bailouts increased the national debt to $ 16.3 trillion by December 2012.
The mid-term election held in 2010 changed the power equation in Washington. The strength of the Democrats in the Senate declined, though they retained their majority. In the House of Representatives, the Republicans emerged as the majority. The conservatives amongst the Republicans, known as the Tea Party, came to exert greater control on the policy of the party. The Tea Party declared their strong opposition to the increase of taxation on the wealthy and termed the social security programme, including spending on healthcare, Medicare and Medicaid excessive. This change of power equation in Congress made the task of the Obama administration increasingly difficult.
Since mid-2011, President Obama made multiple attempts to reach agreement with the Republicans on fiscal policy. The President met House Speaker John Boehner a number of times but made little progress. The President made proposals, followed by counter-proposals by the Speaker. The President wanted to recast taxation levelling higher taxes on the wealthy and retaining the tax cut to the middle and low-income groups. The Speaker suggested maintaining the existing tax cut to all, including the richest individuals and corporations. President Obama wanted to reduce the defence budget but the Republicans preferred to keep the defence budget untouched. These proposals and counter-proposals were exchanged until the presidential campaign got momentum. During the campaign, President Obama reiterated his commitment to raise income tax for the wealthy and trim the defence budget. The Republican challenger, on the other hand, pledged not to raise income tax, keep the defence budget unchanged and overhaul the entitlements of lower income groups. The campaign sharpened the division between the two camps.
Following his re-election, President Obama resumed dialogue with the Republican leadership. Meetings between the President and the Speaker made no headway; even meetings with senior leaders in Congress failed to break the deadlock. Each side blamed the other for being uncompromising. As the deadline approached, the Speaker tabled a proposal in the House suggesting, among other measures, to raise the income tax only for those earning a million dollars or more per annum. His proposal was rejected by his fellow partymen. When all efforts failed, Joe Biden, the Vice President, came to the forefront of negotiations. He succeeded in drafting a compromise with Mitch McConnell, the Minority Leader in the Senate. The proposal exempted increase of tax to those earning less than $ 400,000 as individuals or $ 450,000 as a family per annum, raising the tax from 35 percent to 39.6 percent to those earning over and above $ 450,000, deferred the spending cuts and postponed the debt ceiling until February 2013. Unemployment benefit for two million people up to 12 months was retained. The proposal was approved by the Senate on January 1, 2013. The conservatives in the House of Representatives threatened to attach amendments to the bill, which would have risked the deal being vetoed by the President. Again, Joe Biden along with Mitch McConnell intervened, steering the bill passed by the House of Representatives by 257 to 169.
The passage of the bill by Congress had the desired effect. Stock markets reacted positively the following morning. The battle is however not yet over. There would be showdowns on the question of spending cuts and the national debt ceiling as early as next month. Though it is claimed that 98 percent of the population would be exempted from tax hikes, payroll taxes would increase from 4.2 percent to 6.2 percent with effect from this month. This would affect 160 million people. Thus, 77 percent of the people would be subjected to higher taxes with effect from January this year. Economists have warned that this might reduce annual growth by one percent. Uncertainty will continue on job creation and the unemployment rate might remain at the present 7.8 percent. The bill would shield the pay raise to members of Congress.
President Obama has failed in the brinkmanship expected of him in the events that led to the fiscal cliff deal. President Ronald Reagan dealt with a Congress led by the Democrats and President Clinton had to deal with a Congress dominated by the Republicans. They were able to reach out to legislators on both sides of the aisle and get the job done. In the present crisis, it was Vice President Joe Biden who emerged as the deal broker and link between the two opposing blocks. In his absence, the US would have witnessed a historic catastrophe. The 112th Congress, which finally passed the fiscal cliff deal, was described by a CNN columnist as slow in productivity, rich in obstinacy and, at times, less popular than communism; it took leave on January 3 with an approval rating below 20 percent. On the same day, the members of the new Congress took oath.
The writer is a former international civil servant, a former UN official and a freelance columnist. Based currently in the US, he can be reached at [email protected]