Forget the fiscal cliff. The real threat to the U.S. economy is not political stalemate in Washington but the Republican party itself.
From the time that President Obama first took office in 2009 through the elections in 2012, the GOP has been running on the platform of economic despair, and in fact, seems to have bet its entire future on it.
In the beginning it was easy, since the president had just inherited a massive financial crisis and a shattered economy that would take years to rebuild; all the Republicans had to do was stonewall any initiatives that would hasten a recovery, and wait. That gave them the edge they needed to rout the Democrats in the midterm elections. Following that, they adopted the strategy of blaming the financial stimulus package and Dodd-Frank for the continuing softness in the economy, which kept the pressure up on Obama and, more importantly, kept him on the defensive.
But now the landscape is different. Obama has four more years to do his thing, the disastrous Mitt Romney campaign has damaged the Republican party immeasurably, and the economy is visibly recovering, so the Republicans cannot just sit back and hope that everything will go wrong anymore. If the economy continues to grow, the president's second term will be a victory, period. That means the Republicans actually have to make sure it goes wrong -- or any hopes that they have of making meaningful gains in future elections will be dashed.
Which is why their new strategy is to actively derail the economy.
Think of it as the Republican long game -- if the U.S. falls back into a recession, the president's promises of a better future will be perceived as empty rhetoric and the Democrats will lose credibility, paving the way for Republican victories in 2014 and 2016. It may be pretty devious but it is also that simple. To accomplish this goal, the Republicans seem to have settled on two angles of attack:
Cut Spending till it Hurts
Republican posturing on the fiscal cliff has revolved mostly around lower taxes for wealthy Americans, but what they really want is deep cuts in government spending (taxes are mainly a bargaining chip). The problem, of course, is that deep cuts in spending right at the cusp of economic recovery will likely send us back into a recession. From outright unemployment for federal workers to cuts in state and local government grants, spending cuts would stifle national growth almost overnight. The setbacks would impact nearly every sphere, including infrastructure, education, healthcare, financial reform, and consumer protection, leading to "domino effect" declines in consumer confidence, spending, commercial activity, employment, and ultimately the economy.
Granted we have a trillion-dollar deficit problem but deficit reduction also requires GDP growth and an increase in the tax base, which cannot happen in a declining economy; not to mention that any action that slows our momentum at this time would be counter-productive to the deficit in the long run since we will simply have to run up a bigger tab later.
The right approach would be to phase in spending cuts slowly and time them to succeed economic growth, not precede it. But that timeline would not suit the Republicans at all since it would take us further into Obama's term and enable him to take credit for a good economy. So, regardless of the fiscal cliff outcome, you can bet that the GOP will flog this horse well into next year and keep pushing for deeper and deeper cuts until they strike bone.
Nothing pours cold water on economic growth like uncertainty. When the rules of the game are defined clearly, even if they are unfavorable, all players can strategize accordingly and aim for success; but when businesses and consumers have no idea what is going to happen next, their plans just stall in the mire of nervousness. That is what happened during the debt ceiling debate of 2011 and in painful slow motion this year on the fiscal cliff. Despite dire warnings by economists of another recession if America goes over the cliff, and despite the financial soundness of letting the Bush tax cuts expire for the rich, the Republicans have done everything in their power to prevent a compromise from being reached. The net result has been an unnecessarily prolonged period of uncertainty and market tumult.
This is a clear-cut case of obstructionism with a purpose, and it will not stop with the fiscal cliff either. Christmas may be over but for the Republicans the first half of next year is an extended holiday season, with gifts ranging from another debt ceiling fight to further arguments on tax cuts and Wall Street reform all waiting to fall into their political laps. And they will exploit it all to create as much uncertainty about the future as they can, for that is the surest way to derail our economic progress and ensure that President Obama does not preside over a prosperous country for the next four years.
Compromise might help the Republican party regain its credibility with American voters but then Republicans have never been good at fighting from a positive place. They are much more comfortable playing offense, and that is why they will kill our economy if they can -- because it is their last, desperate, hope for survival.
So how will it stop?
It won't, unless the American public pulls their support of the party completely. Even if you agree with the Republicans ideologically, you should ask yourself whether a party that is willing to destroy your livelihood for political gain should be allowed to represent you at all... and then vote the opportunists out of office before they ruin the country!
SANJAY SANGHOEE has worked at leading investment banks Lazard Freres and Dresdner Kleinwort Wasserstein as well as at a multi-billion dollar hedge fund. He has an MBA from Columbia Business School and is the author of two financial thrillers, including "Merger" which Chicago Tribune called "Timely, Gripping, and Original". Please visit his Facebook page for more information.