The story is by now well-known. Unless there is a deal in Congress by the end of the year, the Bush-era tax cuts and the payroll cuts will reverse automatically; extended jobless benefits for the long-term unemployed will be cut off; defence spending will be cut; so on. Everybody’s sacred cow is sacrificed. The combined austerity would be around $700bn over 2013, or 4.5pc of GDP.
The youth jobless rate is 58pc in Greece, 54.2pc in Spain, 35.1pc in Italy, and 25.7pc in France.
Labour economist and Nobel laureate Peter Diamond says the life trajectory of these young people will be damaged. There is almost nothing worse you can do to the productive potential of an economy - and therefore to debt ratios - than locking a great chunk of the future workforce out of the system during their formative years.
“They have a debt problem and an unemployment crisis, but they think it is the other way round,” he said.
The tragedy is that Europe is wasting its last chance to train a workforce for the 21st Century before its demographic crunch hits later this decade. EMU leaders - like the donkey generals of the trenches - are fighting the wrong war. They are crippling a generation. Budget deficits are coming down - though far less than assumed - but the skills deficit of the jobless army is going through the roof. It is the tyranny of the Maastricht Treaty.
It would be a double tragedy if the US succumbed debt fetishism and made the same historic misjudgement.
In 2008, US government debt was 70pc of GDP. Now it is 102pc. The last time it was this high was in the aftermath of the Second World War. Back then, America was a nation in its zenith, about to embark on a population boom and a run of growth and rampant economic development. America today is an ageing society, weighed down with liabilities stretching years into the future.
For above and beyond the impending fiscal shenanigans, there is no sign whatsoever of any political agreement on how to reform old age benefits so as to prevent the derailment of Uncle Sam’s finances over the coming decades as tens of millions of baby boomers retire.
Some want Obama to use the political leverage he has gained from re-election to raise taxes and lock-in higher benefits. The real leverage the president has, in his second and final term, is that he doesn’t need to worry about re-election. That’s why Obama should offer the Republicans a deal to rein in the country’s ballooning entitlement spending before it spirals completely out of control. Only then will he give America the “hope” he so eloquently offered at the start of his presidency.
Chicken is not a complicated game. Only one thing can improve your chances of winning: sending a credible signal that you will not be the person to swerve from the collision.Let's stop right there because Harding is out of his mind. Someone is always a winner, at least in relative terms, and in politics, relative terms is what matters.
Election over, the Republicans and Democrats are now revving up for the fiscal cliff, and the game is chicken. If there is no deal then everybody loses.
If one side swerves then the other wins; and if both swerve – extending all current policy – then we come back next year and do it all again. In order to show that they will not swerve, politicians on both sides are publicly flirting with the idea of going over the cliff, at least temporarily.Precisely. The real game of chicken is exactly the opposite of what Harding first suggested. The real game of chicken is neither party can figure out precisely who will benefit from the fiscal cliff.
If everybody knows how much damage this would do then the credibility of these threats is easy to assess. The danger comes, however, if people have different views of the cost, making their actions less predictable – and so far economists have not helped by sending out a mixed message.
There's an interesting thought: Let the fiscal cliff happen, then pretend to cut taxes days later.
“If the Republicans will not agree with that, we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year,” said Patty Murray, who was co-chair of last year’s deficit supercommittee, on ABC’s This Week. “And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this.”
The Washington senator is one of the most senior figures from either party to suggest that temporarily going off the fiscal cliff could be an acceptable way to break the impasse over fiscal policy. Her hard line could strengthen the negotiating position of Democrats but frighten markets.
Going off the cliff would have the political advantage of letting Congress vote for tax cuts, after they go up automatically at the end of the year, rather than voting for tax rises now.