Divided US faces 'fiscal cliff'

The Dow Jones industrial average plunged 313 points to end at 12,933, its worst day of 2012, the Standard & Poor’s 500 index fell 34 points to 1,395 and the Nasdaq composite index gave up 75 points to 2,937.

The challenge is to overcome the self-imposed “fiscal cliff”, dramatic and automatic tax increases and spending cuts that could drag the nation back into recession.

But in day-after-election remarks Republicans signalled no readiness to give up on their ideological opposition to raising taxes on high-income Americans, but instead were continuing to push for lower rates across the board.

That Reagan era theory, known as trickle-down economics, holds that cutting taxes will vastly increase the size of the income and profit pie, thereby producing more revenue even at lower tax rates.

Speaker of the Republican-controlled House of Representatives, John Boehner, laid down that position yet again as the condition for working for any increase in government revenue in return for Mr Obama’s stated – but undefined - willingness to cut spending on crucial social programmes.

The opening gambits did not argue for a quick solution to the country’s skyrocketing debt and stubbornly high deficit that has the government now spending more than one trillion dollars a year more than it collects in taxes.

In the face of those challenges, Mr Obama had told Americans on election day that he had never been more optimistic.

“The best is yet to come,” he said at his early-morning victory rally in Chicago yesterday.

Now the immediate test is whether the country’s deep partisan divide can be narrowed, as Democrats under Mr Obama’s leadership try to work out a compromise with Republicans to avoid the “fiscal cliff” that could force spending cuts totalling 800 billion dollars (£503bn) next year alone.

Mr Obama’s victory and exit polling of voters showed a majority of Americans supported or were resigned to higher taxes to begin cutting national red ink.

But Republicans could still moderate because voter rejection of their challenger Mitt Romney and his party’s drift to the far right will surely bring a deep reassessment of strategy.

The Republican base – dominated by diminishing numbers of white men – is shrinking, while the country moves towards a day when minorities – blacks, Hispanics and Asians – become the majority. Mr Obama’s second-term victory was sealed by massive minority support.

Mr Obama’s re-election guarantees the full implementation of his signature legislative achievement, the overhaul of the nation’s healthcare system, which Republicans had vowed to overturn.

Likely, too, will be a continued US foreign policy that depends on multi-national partnerships in dealing with issues like Syria’s civil war and Iran’s nuclear programme – which Mr Romney said were a sign of American weakness.

And China, facing its own leadership transition, should be relieved – Mr Romney had pledged to declare it a currency manipulator, potentially leading to sanctions and escalating trade tensions.

But before Mr Obama faces inauguration in January comes the “fiscal cliff” at the start of 2013. It includes big tax increases for nearly all Americans and deep spending cuts, including reductions in spending for the military and popular social programmes.

It grew out of the government’s inability a year ago to reach a deal on cutting the deficit and debt that has climbed above 16 trillion dollars.

As he spoke in Chicago after his victory, Mr Obama forecast the big fight to come, saying it will “inevitably stir up passions”.

“That won’t change after tonight, and it shouldn’t,” he added. “These arguments we have are a mark of our liberty.”

That puts a best face on what will be a brutal ideological fight.

Mr Boehner, probably the most powerful Republican in Washington, reminded Americans that his party still held the high cards with their majority in the lower chamber of Congress.

“Voters made clear there is no mandate for raising taxes. Obama has proposed higher taxes on households earning over 250,000 dollars a year, and that is what killed attempts at compromise a year ago,” Mr Boehner said.

Setting up a continuing legislative gridlock, Democrats continue to hold control of the Senate and are able to trump conservative legislation that originates in the House of Representatives.

As leader of the Senate minority, Republican Mitch McConnell signalled a readiness at continued obstruction if the Democrats and the president did not capitulate.

“The voters have not endorsed the failures or excesses of the president’s first term,” said Mr McConnell in frosty post-election remarks. “Now it’s time for the president to propose solutions that actually have a chance of passing the Republican-controlled House and deliver in a way that he did not in his first four years in office.”

But Mr Romney tried to set a conciliatory tone on his way off the national stage.

“At a time like this, we can’t risk partisan bickering,” he said. “Our leaders have to reach across the aisle to do the people’s work.”