American elections are many things.  One thing they rarely produce, however, is a deep and detailed discussion of policy proposals.  This is particularly true for economic policy.  In 2012, both presidential candidates have gone to great lengths to avoid discussing what they would actually do if elected because each is likely to engage in a high-stakes game of chicken, since this would not endear them to the voters, particularly the few remaining undecided ones at the middle of the political spectrum. Awareness of how this high-stakes game would unfold in an Obama or a Romney administration is essential to understanding the direction of the United States and the world economy in the coming years.  The economic path the country takes will differ substantially, depending on which man wins the presidency.

Still, the game the next president will play, regardless of who wins, is chicken—because the American economy is hurtling toward what Federal Reserve Board Chair Ben Bernanke has dubbed, “The fiscal cliff.”  The fiscal cliff is the combination of tax increases and spending cuts set to go into effect on 1 January 2013.  The tax hikes, which come to the equivalent of 2.7 percent of the gross domestic product in 2013, result mainly from the expiration of the income tax cuts that George W. Bush instituted in 2001 and the temporary reduction in payroll taxes that the Obama administration championed in 2010.  The spending cuts, which amount to 0.5 percent of GDP in 2013, are the product of the “sequestrations” prescribed in the 2011 Budget Control Act.  Sequestrations totaling $1.2 trillion over nine years would fall across the board because the so-called “super committee” of Democrats and Republicans was unable to reach a budget agreement.  The 2011 Act does spare the social security public pension system, Medicaid health care for those with low incomes, and civil and military employee pay from cuts.  It also caps reductions of the Medicare health program for the elderly at 2 percent.  Bernanke called this convergence of tax increases and budget cuts a cliff because if they were to happen, they would trigger a new economic recession.

The fiscal cliff places Barack Obama in a relatively strong political negotiating position, were he to be reelected.  If Obama were to do nothing—which some observers have dubbed the Thelma and Louise strategy because of the famous 1991 movie by that name, which ends with the two heroines driving off a cliff to avoid capture by the police—he would accomplish two objectives that entertain considerable support in Democratic Party circles.  He would end the Bush-era tax cuts and he could achieve a large measure of fiscal consolidation along lines that match the preferences of most Democratic voters: defense spending would be curtailed, but social programs would be largely spared.  For Republicans, in contrast, there are no benefits to driving off the fiscal cliff, save for undertaking painful fiscal consolidation when the other party holds the presidency (which is likely to produce an economic downturn for which he then can be blamed) and the rhetorical opportunity to denounce Democrats for increasing taxes and cutting defense.