The fiscal cliff deal proves Congress is working

Us fiscal cliff

The United States may now have, for the first time since 2009, a legislature capable of creating bipartisan majorities of pragmatic Republicans and Democrats working together on issues of fundamental importance to American voters. The more this pattern becomes established, the more it will neutralize radicals, both in the Tea Party and the Democratic left. Having compromised so many principles and suffered such acute political embarrassments during the fiscal cliff bargaining, the last thing Republican leaders will want to do is repeat the same experience in two months' time. Future policy clashes, at least over economic policy, are likely to be less viciously adversarial, not more so, especially when the ultimate outcome of the argument is obvious and inevitable, as it was in the case of the fiscal cliff.

But will avoiding a default by the U.S. Treasury be seen as necessary and inevitable in the same way? This will depend on President Obama discovering an interest in economic policy detail that was notably absent from this recent debate and from his first term generally.

Most American voters believe, according to opinion polls, that the United States faces a grave budgetary crisis, and that public spending is rapidly rising, implying a slide towards Greek-style bankruptcy unless deficits and debts are brought under control. These statements are manifestly false.

U.S. deficits and debt, far from rising to infinity, are actually quite stable. Deficits have been halved since 2009 and will decline by about $150 billion annually in each of the next three years, according to the Congressional Budget Office. Meanwhile total debt is projected by the CBO to stabilize at around 82 percent of GDP from next year until 2018. And that is before any of the tax hikes agreed to this week. Taking account of roughly $620 billion in extra revenues raised by the fiscal cliff deal, U.S. debt will stabilize at a significantly lower GDP share and will probably do so by the middle of this year. This helps explain why the panic about national bankruptcy in Washington does not seem to affect private investors, who happily lend money to the U.S. government at the lowest interest rates on record.

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