Compromise

In the end, the politicians in Washington decided to shake hands, kick the can down the road and go home. They had worked through the night while everyone else greeted the New Year. All the work, and all the suspense, like the mountains heaving to put forth a mouse, did not resolve the basic issues.

Nobody loves a compromise. What was finally struck at the US Congress on the first day of the year pleases no one. The deal, however, allows the US economy to avert the worst possibilities presented by the so-called “fiscal cliff.” That does not mean all is fine.

The US, technically, fell into the fiscal cliff the moment that famous ball was lowered in Times Square. The US Senate voted, two hours past midnight, on a compromise bill that averts a tax rise for 99% of Americans.

Taxes were raised on individuals making $400,000 and couples making $450,000 annually. Tea Party Republicans, the most conservative of the lot, wanted no tax increases at all, only deep spending cuts to close the deficit. Obama, during his campaign stump, wanted a threshold of $250,000.

The massive spending cuts scheduled for the first day of the year were postponed for about two months. That means that on February, we will see the same frantic wrangling we saw the past week.

Technically, again, the US government has hit the debt ceiling Congress imposed much earlier. The US Treasury, however, is moving finances around to postpone that event for about two months.

The debt ceiling is a congressionally established limit on what the US government could borrow. It was set after the last elections when voters brought in a wave of conservative Tea Party politicians to Congress. The Republicans are not likely to budge on the borrowing limit. It is their last item in the policy toolbox to force the US government to cut back and spending. In their view, government has become way too big and way too expensive to maintain.

The “fiscal cliff” crisis Washington is trying to grapple with is, in every sense, a creation of the Tea Party movement — a noisy but marginal political stream demanding smaller government and lower taxes. This movement combines social conservatism (the so-called Religious Right) and economic libertarianism (the belief that more and more decisions should be passed from the public to the private sector).

The conservative Republicans reject social welfare programs sacred to the Democratic Party. These programs, they hold, encourage dependence on government and make the successful pay for the needs of those who chronically fail. The late-breaking deal notwithstanding, the conservatives will continue to hold the line against subsidy programs (such as the new health care system) that force constant increases in taxation.

Mainstream American opinion is against drastic cuts in spending, not only because this could induce a recession but also because this limits government’s ability to equitably distribute opportunities through public education and health care programs. Most Americans now blame the conservative Republicans for causing the crisis by imposing unwise legislation on debt limits and spending cuts.

The process of finding a compromise solution to the “fiscal cliff” frayed the Republican Party, just weeks after that party lost so badly in a presidential contest. Mainstream Republicans wanted a deal cut to avert falling into the fiscal cliff — a calamity for which the Republican Party will be blamed for causing, vastly diminishing that party’s future prospects. In accepting a compromise with the Democrats, the mainstream Republicans shunned their hardline Tea Party colleagues.

We saw, as part of last election’s fallout, much talk of the need for the Republican Party to redefine itself if it intends to be viable in future elections. The Grand Old Party (GOP) was taken hostage by Tea Party activists holding arcane views on social issues increasingly distant from mainstream opinion. Its stand on immigration reform and health care, for instance, caused the party to lose support from minorities, women and young voters — every vital demographic that will decide future elections.

The compromise package entered into by some Republican legislators to avert the fiscal cliff becomes, in turn, part of the process of the party redefining itself in the face of contemporary circumstances. That process of redefinition, moving from the right towards the center, will be a painful one for the party.

As far as the rest of the world is concerned, however, the ideological crisis facing the Republican Party is of least concern. All that matters is that the US economy avoids returning to recession. Any policy compromise that achieves that is well and good.

As soon as the compromise legislation passed the US House of Representatives yesterday, the markets in Asia rallied heartily.

Of all the mature industrial economies, only the US posted any significant growth last year (3.1%). Most of the Eurozone economies face recession. Even mighty Germany is expected to slide into recession by midyear.

If no deal was reached in Washington the past couple of days, even if this means merely kicking the can down the road, the US economy would have certainly returned to recession. That held dire possibilities for the Europeans, pushing down total global growth. Such an outcome is certainly not good news for the emerging economies everywhere else.

Even as the politicians in Washington will continue wrangling the next few months over how to deal with the US’ ballooning debt, the rest of the world is happy that a global recession has at least been averted — for the moment.