It’s been less than a week since the election, and already the Media fretting about the “fiscal cliff” is approaching fainting couch-level hysteria. I can’t understand how, within days of a historic Democratic electoral victory, our sole political focus is supposed to be how much to slash government spending. Still, January 2 does trigger the beginning of large tax increases and spending cuts, and deficits are a genuine problem. so I suppose it deserves to be on the front burner of our attention.
What’s really going on here? How bad will the fiscal cliff be, who’s to blame for it, and who would it target? More importantly, what are they going to do about it, and what should they do?
On Monday, I’ll lay out the basic Who, What, and Why of this situation. Then, I’ll explain a little about the two parties’ vastly different goals and priorities for any “grand bargain” to be negotiated before or after (either is possible) the New Year. Then, we can decide for ourselves what maybe they should do, since we, not the Media elites, are supposed to be ones whose opinions matter.
But, since the basics of this are so complicated, here is a summary.
What Is the “Fiscal Cliff?”
On January 2, 2013, three big changes to taxes and spending, already written into law, will happen, unless Congress and the President agree to stop or modify them.
- Bush Tax Cuts: All of the Bush tax cuts, now in their 2nd decade, expire.
- Sequestration: Huge ($1.2 trillion over nine years) spending cuts begin, as part of a deal made in 2011 to bribe House Republicans into agreeing to raise the debt ceiling so we wouldn’t default on our debts and wreck our economy. One-half of the cuts will be to defense spending (Dems insisted), and the other one-half will hit domestic spending (the GOP insisted). [UPDATE: I should have added that Social Security, Medicaid, and some other social programs will be exempt from cuts – but that means cuts to other programs will be deeper.]
- Other Tax Increases: A temporary payroll tax cut that Obama got as part of the debt ceiling deal will expire. The other big one is the Alternative Minimum Tax.
ATMAMT rates will reset and start hitting many upper-middle class people.
Who Will Get Hurt If This All Happens?
I’ll summarize it more simply and sweetly on Monday. The big, broad spending cuts would devastate non-defense discretionary spending, except the exempt programs, obviously (thank Obama for demanding it). The Defense cuts are pretty huge, across-the-board, and thus arbitrary. The tax increases would have the following effects, by income level:
Notice that some tax increases would hurt of lower income people and others higher income people. On the other hand, letting even some of these tax hikes and spending cuts kick in would help to tame our deficit problem, which is the point.
Why Are We In This Mess?
Look, I have a higher loyalty to the truth than I do to phony, non-partisan niceties. We are in this situation almost entirely because of deliberate actions by Republicans Party elected officials. Period. The Bush tax cuts expire every January because in 2001 and 2003, Republicans designed them that way. Why? To mask the ten year budgetary costs (for the PR advantage) by making them sunset after nine years! To be fair, Obama and the Democrats have always agreed that those Bush tax cuts for everyone making under $250,000/year should keep being extended indefinitely. But, we now have to do this every year because Bush et. al., felt they could not be honest back then.
The $1.2T in spending cuts is an even worse story. In the 2011 debt ceiling showdown, Republicans turned down an Obama offer to close the deficit with 80% spending cuts and 20% tax increases. To get them to vote to raise the debt ceiling and avoid catastrophe, Obama got them to agree to automatic cuts (1/2 in Defense, ½ not) if a bipartisan deficit reduction commission set up just for this purpose could not agree how to close the gap. The commission, known as Simpson-Bowles, failed to do so because every Republican on it flatly refused to accept any tax increases at all. So, here we are with these sequestration cuts looming.
The other tax changes due to take effect, like the payroll tax cut and the ATM thing, are more a shared responsibility between the two parties.
SO, WHAT WILL THEY DO ABOUT IT?
Almost no one (actually, some liberals – I’ll explain why) wants all of these to happen. The Republicans want all the Bush tax cuts to continue indefinitely, although they really only care about extending the cuts for those making over $250,000 per year. The Democrats want to keep the cuts for the middle class, but not for the wealthy. The Republicans demand NO cuts to defense spending, and the Democrats are wary of them too, although Dems really hate the deep cuts to non-defense programs. There is some agreement on the other changes (like the “ATM patch.”)
DISCUSSION QUESTIONS –
- What would happen under the “fiscal cliff;” i.e., on January 2 under current law? Why are we in this situation?
- What effects would a full fiscal cliff face plant have on the economy and the deficit?
Who would be harmed by it?
- What are the options for avoiding the fiscal cliff? What about just letting g it happen?
- What do the different sides (White House, Dems in Congress, Republicans in Congress ) want to do differently? What are their top priorities? Why?
- What might an agreement look like? How can we tell which side “won?”
- How can a long-term problem like deficits (or for that matter, climate change and others) be resolved by a political system that can only really make short-term decisions?
- What is the “fiscal cliff?”
- The budget sequestration part explained, plus why neither side wants this.
- We need to do a grand bargain and include significant spending cuts.
- Yes, we do. It’s a great opportunity.
- No, we don’t. This is the same old long-term conservative elite effort to destroy entitlements and the Great Society and New Deal.
- In fact, there is no real deficits crisis! Liberal #2 and #3 (both economists): This whole frenzy to shrink the deficit drastically now is phony.
- Which side is holding the best negotiating hand (long – start on page 4)? Would you believe neither?
If you need more explanations than these, you have a stronger stomach than me. See you all on Monday. As always, tell a friend about this great group!