Fiscal Cliff Sequel: Taiwan Must Not Cross the Line
China Times editorial (Taipei, Taiwan, ROC)
January 5, 2012
Summary: The White House and Congress reached a last minute agreement. They
prevented the fiscal cliff from becoming a reality. Stock markets around
the world rose in response. But the celebration will not last long. The
sequel to the fiscal cliff will soon debut. Add this year's global
economic risks, and turbulence in the financial markets will be
difficult to avoid.
Full Text below:
The White House and Congress reached a last minute agreement. They prevented the fiscal cliff from becoming a reality. Stock markets around the world rose in response. But the celebration will not last long. The sequel to the fiscal cliff will soon debut. Add this year's global economic risks, and turbulence in the financial markets will be difficult to avoid.
During in the second half of last year, analysts constantly reminded the US government about the risks of the fiscal cliff. The so-called fiscal cliff refers to the 2013 expiration of the Bush administration's preferential tax rates. This will automatically restore higher tax rates. Also, in order to balance the budget, the government will begin "automatic deficit reduction." The government will raise taxes. The public will reduce consumption. Government deficit reductions and spending cuts will work in combination. According to Federal Reserve (FED) Chairman Ben Bernanke, together these will withdraw a great deal of income from the economy. It will affect spending and short-term economic recovery. According to Congressional Budget Office estimates, once the economy falls off the fiscal cliff, the United States will enter a recession. This year it will experience a negative growth rate of 0.5%, and an unemployment rate of 9%.
No one is willing to leap off this cliff. Republicans may have been unwilling. But they were forced to compromise. U.S. President Barack Obama smirked with satisfaction during a press conference. But this situation will not last. The two parties will immediately begin another round of struggles. The agreement addresses only the tax increase portion and the deficit reduction portion. The U.S. Treasury Department used cash scheduling and other methods to postpone the U.S. debt ceiling by two months. But they will eventually have to confront the problem. The White House wants to increase the debt limit. Republicans want to cut welfare spending. The two parties are locked in combat. Financial market turmoil is difficult to avoid. The view from the market is that the agreement is merely an expedient. It is not a fundamental solution. Further negotiations will lead to market volatility.
The paradox is that if the two parties cannot reach an agreement, in two months the United States will go over the fiscal cliff. The global market economy will plumb new lows. Under normal circumstances, the two parties would wrestle for a while, then each take a step back. The White House would reduce some of its expenditures. Congress would raise the debt ceiling. Unfortunately reaching an agreement is not necessarily a good thing. It means America's fiscal problems will become increasingly severe, and step by step advance toward the red zone.
No wonder the three major credit rating companies said that going over the fiscal cliff might be better than reaching an agreement. The credit rating companies feel that the United States government must come up with a way to reduce debt as a percentage of GDP (gross domestic product). At the same time, it must achieve revenue growth and make spending cuts. Otherwise, the U.S. national debt rating could be downgraded. Given the reality of the political and economic situation in the United States, the possibility of achieving this goal is low. Especially given that the process of American political compromise could undermine outsider confidence in the United States' ability to solve its fiscal and economic problems. Lest we forget, Standard & Poor's cut the U.S. sovereign credit rating the previous year. One of the reasons was American political battles. Congress can not afford to compromise.
Any country, especially an elective democracy, will find itself bogged down once their fiscal affairs enter the red zone. It will find itself sinking deeper and deeper, unable to extricate itself. This is true of the United States, Japan, and the PIIGS. Ultimately, the nation's fiscal affairs will lead to collapse. The social and economic adjustments will be great and painful. When nations find themselves in these circumstances, the government lacks the financial resources and ability to cope.
During the Clinton administration, the United States enjoyed a budget surplus. But once Bush took office he made massive tax cuts. He made significant increases in expenditures in the War on Terror. As a result the US once again experienced financial difficulties. After the financial tsunami of a century, the U.S. government no longer has the ability to expand its fiscal policy. All it can do is promote the massive printing of money, i.e., Quantitative Easing. By contrast, Germany and the Nordic countries, normally practice fiscal discipline. During a crisis the country is able to ride out the storm. The government has the ability to adapt to changes. Therefore, normally adhering to fiscal discipline is key.
ROC debt at all levels of government is only about 4% of GDP. It is much lower than in other countries. But add hidden liabilities, and the figure soars to over 100%. The economy is in recession. The government should increase spending. Instead, government public works spending has been reduced. Endless arguments over whether the pension system is bankrupt have triggered social unrest. Government finances have already entered the red zone. The United States is the world's number one power. It has the advantage of being able to print dollars, the global reserve currency, If its fiscal policy is poor, it can expand its money supply. Other countries do not have this privilege. Therefore they face the same dilemma as the PIIGS. The ROC must learn from the United States and Europe. It must put its fiscal house in order. It must increase fiscal discipline, cut costs, and prevent its fiscal affairs from becoming bogged down. Otherwise it will reach a point of no return. If it attempts to make changes too far down the road, society will pay a painful price.