Federal Reserve Chairman Ben Bernanke talks on Tuesday about the "fiscal cliff"
The President and Congressional leaders opened talks in Washington last Friday on ways to avert the "fiscal cliff". A package of spending cuts and tax increases, due to take effect in January, is predicted to damage America's stuttering economic recovery --- even plunging the country back into recession --- but initial reports on the White House consultations stressed that both sides in the negotiations found the talks “constructive".
No one seriously expects the path to a resolution of America's debt and deficit problems to be as smooth as the reports suggested. Both Democrats and Republicans are concerned about their respective bases of support, and both those constituencies –-- the progressive wing of the Democrat Party and fiscal conservatives in the GOP ---will press their politicians in Washington to make few concessions.
The need for compromise may be the public message, but that position, even if it is a sincere desire, is threatened by the involvement of the outside groups. Among the largest players on the Democratic side are the AARP (American Association of Retired People), unions, and some business leaders in the Fix the Debt campaign, while Republican concerns are represented by Grover Norquist's Americans for Tax Reform, various conservative think tanks and Tea Party organisations, and another group of business leaders in the Tax Relief Coalition.
The fiscal cliff is an immediate problem requiring decisions on a host of upcoming tax raises and spending cuts, but the ultimate issue at stake is how America will reduce its annual deficits over the longer term. A Congressional Budget Office report, "The Challenge of Deficit Reduction", is concerned about the rising costs of health care, resulting from the aging of the population, and the unsustainable costs and consequences of long-term growth in the national debt:
It is possible to keep tax revenues at their historical average share of GDP—but only by making substantial cuts, relative to current policies, in the large benefit programs that aid a broad group of people at some point in their lives. Alternatively, it is possible to keep the policies for those large benefit programs unchanged—but only by raising taxes substantially, relative to current policies, for a broad segment of the population. Changes in other federal programs can affect the size of the changes needed in taxes or large benefit programs, but they cannot eliminate the basic trade-off between those two parts of the budget.
The CBO's basic contention is that Americans must either expect to pay higher taxes than which they are accustomed to pay for the social safety net, or they have to gut spending on welfare programme. The CBO is clear that there is no other option: reductions in military spending or federal departments like Agriculture and Transport are nowhere near enough to solve the dilemma.
Because of President Obama's re-election and Democratic gains in the House and Senate, organisations that seek increased revenue through taxes, rather than cutting spending or reforming entitlement programs, have been the loudest voices. The AARP has 37 million members and a budget of $1.3 billion, and its Bulletin, sent to all members, is the world's largest-circulation publication. Immediately after the election they polled members:
Across party lines, the majority of adults age 50+ (76%) oppose reducing Medicare benefits to reduce the deficit (84% Democratic, 70% Republican, 74% Independent). Similarly, a majority (75%) oppose reducing Social Security benefits to reduce the deficit (79% Democratic, 70% Republican, 76% Independent). Furthermore, two-thirds (67%) believe changes to Medicare and Social Security should be made based on the needs of the people and not just their impact on the budget.
Those are significant majorities, and. as part of their “You've Earned Your Say” campaign. the AARP are lobbying politicians to let them know that their members are opposed to any changes to Medicare and Social Security. “It is the 900-pound gorilla,” says Frederick R. Lynch, an analyst of the organization. “All AARP has to do is whisper.”
On Tuesday, the three largest public-sector unions ran advertisements set to run in the districts of moderate Democratic Senators and House Republicans to persuade them to support President Obama's call for increased taxes on the wealthy. One labour official said:,/p>
We are struck by how clearly the American people see that the answer to long term deficit reduction is jobs, not cuts. It can only be done by creating jobs, making the rich and corporations pay their fair share and protecting the middle class from a tax hike and cuts to Social Security, Medicare, Medicaid and education.
The most strident opposition to cuts in welfare programmes has come from the Campaign for America's Future website wageclasswar.org:
In 2012, candidates who supported the economic interests of the many over the few won their elections. Populism was the voice, but economic opportunity was the message. The pundits may wring their hands, but in the future it won't be values voters, angry white men or soccer moms that win elections. It will be class war.
That remains to be seen, but America's politicians are wrestling with a basic problem --- raise taxes or cut welfare spending --- and the interested and influential advocacy groups are unlikely to be accommodating. Thought organisations supporting Obama are shouting loudest now there is little doubt that, once Republicans have come to terms with their electoral defeat, conservatives will push back hard. This is a game which is only beginning and in which the President and members of Congress are far from the only players.