Fiscal Cliff Diving
Back in May, I predicted a series of likely budget confrontations facing Congress late this year or early next: the expiration of the payroll tax holiday, the need to again raise the debt ceiling, expiration of the Bush tax cuts, the sequestration of funds mandated by the last debt ceiling deal, the annual October 1 end of the fiscal year, and possible moves on spending, Social Security, and Medicare. Last week, I gave an update dealing with sequestration, and another update this week on votes concerning the Bush tax cuts.
These important issues might go in unexpected ways. Yesterday, in a relatively quiet no-drama bipartisan deal, leaders of both Houses and both major Parties reached agreement to keep the federal government running until after the November election. It’s but a six-month continuing resolution, which means they’ll have to come back to the subject next year, but they got it done two months early instead of waiting until well after the last minute.
This may point in some new directions, though I doubt we’re about to see a bed of roses. Well, maybe the thorns part.
A large factor leading to the agreement might have been the desire to get out of Washington so as to become deeply involved in the real business of Congress: fund raising. There may also have been some awareness that wasting taxpayer money by refusing to do their jobs doesn’t play well anymore, and would look unseemly in the middle of a campaign.
But don’t pop the corks yet. The actual vote on this deal won’t happen until Congress returns in September from its seemingly thrice-monthly five-week recess. If you remember last year, the Tea Party served as a major block to enacting federal spending bills, as well as to raising the debt ceiling. There’s still plenty of time for Tea Party members to change their minds after hearing from their constituents who don’t like things getting done. This wouldn’t be the first time a deal fell apart after a recess.
The point, for Republicans, is to hold the business of government hostage while demands are made to lower taxes and/or cut domestic spending. They’ve proven themselves adept at stopping government. It’s really very easy to do, if you know how; this chart shows the stunningly small number of bills that have passed this Congress, as compared to historical numbers. Of course, this inactivity might be seen in a positive light by Tea Party advocates who think that a government that does least does best.
Inactivity and obstructionism may play against Republicans for the remainder of this Congressional term, however, and perhaps this is another reason Republican leadership is suddenly displaying a willingness to get things done. A growing movement within the Democratic Party is whispering about going off the cliff, and a number of Republicans are already panicking.
The hostage technique Republicans used throughout 2011 was to threaten to do nothing, thus bringing about a government shutdown or a massive world-economy-shattering default when a looming deadline strikes. This apparent willingness to shoot themselves in the head (they just might be crazy enough to do it!) thus extracted various concessions from people too sane to let it happen.
The proverbial shoe, however, has changed feet. On December 31 of this year, because of deals Republicans demanded, America will slam into two important deadlines. First, the Bush-era tax cuts will again expire. Second, about a hundred billion dollars will be “sequestered” as down payment on more than a trillion dollars of spending cuts forced by the failure of the debt-ceiling supercommittee. Doing nothing will make both of these things happen. Republicans are desperate to stop them both.
Think for a moment what the impact would be if we allowed this catastrophe. Republicans have been saying that we must cut spending, and we must balance the budget. The Center on Budget and Policy Priorities has calculated that between these particular spending cuts and revenue increases, the federal deficit will be reduced by 7.1 trillion dollars over the next ten years. The nonpartisan Congressional Budget Office says these do-nothing actions will result in federal deficits being reduced by more than eighty percent. We can’t let that happen, can we?
On the other hand, taxes would go up, and military contracts would be reduced. Republicans don’t want that. They are stuck between inflexible demands of their own rhetoric. To reduce the deficit, cut federal spending, and set the nation on the path to fiscal responsibility — or allow taxes to increase and reduce military spending by perhaps ten percent. Which to choose, which to choose? Worse — to prevent the undesirable portions means actually accomplishing something, getting actual bills enacted — and working with the Democrats to do it. What is a Republican to do?
It is true that allowing the tax increases and reductions in spending might slow the economy, and could prolong the fragile recovery. On the other hand, Republicans have been preaching the glories of austerity, and Austrian economists have been saying for quite some time that, if we followed their suggestions, the economy might take decades to return to where it was ten years ago. Further, Republicans are complaining that the slowdown in the recovery would be caused by a loss of jobs resulting from federal spending reductions — yet they’ve been insisting, for decades, that government spending can’t create jobs.
Notice the leverage Democrats have here. They can make a fiscally responsible case for doing nothing (see the numbers I quoted above), which is far more than the Republicans could do in their hostage demands throughout 2011. Any downside — any tax increases or any slowdown in the recovery — won’t happen until well after the upcoming elections.
What do the Democrats stand to gain by going over this cliff? First, Harry Reid and President Obama have both said that no bill to extend the Bush tax cuts on income over $250,000 will be acceptable. They laid down a gauntlet. They are saying we can extend the tax cuts for all Americans, but not for the portion of the super-wealthy’s income above $250,000. If Republicans want any of the lower tax rates to continue, that is the price. If Republicans refuse, then Democrats will do nothing, and Republicans are forced to swallow the tax increases they are sworn to oppose.
Come January 1, after everyone’s taxes go up, the Democrats’ negotiating position improves still more. Any bill at all then is a tax cut, and after blaming Republicans for having allowed taxes to go up, Democrats can decide which cuts they will allow — provided Barack Obama is reëlected. Even if Republicans gain control of both houses of Congress, a presidential veto threat would force any actions to be crafted to the President’s preference.
A similar situation pertains to the sequestration funds. Republicans are in the position of demanding that spending not be cut. How’s that for standing rhetoric on its head? After the first of the year, undoing the sequestration means having to beg for spending increases, which Republicans seem to hate even more than taxes. Worse, they have to plead for this added spending because the reduction in spending is slowing the recovery and is costing jobs, thus serving as an admission that their previous opposition to stimulus spending was cynically dishonest.
President Obama has said he would not sign any bill that merely restores the sequestration funds, and most particularly not any bill that restores only the military spending, which is what the Republicans want. He’s in a good position to demand revenue adjustments to pay for this extra spending — perhaps by allowing the Bush tax cuts to expire on income over $250,000.
I wouldn’t expect any deal before November. For Republicans to agree to these very reasonable conditions would mean admitting too much of their dishonest 2011 strategies just prior to an election. A deal in a lame-duck session, however, is a very real possibility — after the elections, but before the Democrats’ position strengthens more on January 1.
And if no deal is struck, Republicans get the austerity they’ve claimed to want, and the CBO says we’re on the road to a balanced budget. The Bush tax cuts which Democrats so hate will be gone. The recovery might go slower, but Republicans have been doing everything in their power to make that happen anyway, and the Austrians say this is not only inevitable, but desirable. The domestic cuts, which are the sister of the Republican-hated military cuts, will be firmly saddled on the Republicans — who should accept them proudly, since they’ve been insisting all along this is exactly what they want.
Unlike the 2011 hostage-taking, this is a cliff we should be willing to face, and willing to discuss the pros and cons of avoiding or accepting. It isn’t insane the way defaulting on the federal debt would have been. And that gives the Democrats real leverage.
No wonder Republicans may be trying to look a little more willing to deal.
- Cliff Diving (logarchism.com)
- The Not-So-Happy Anniversary of the Debt-Ceiling Crisis (theatlantic.com)
- “A Not So Distant Nightmare”: Women Will Get Pushed Off The Fiscal Cliff (mykeystrokes.com)
- How to avoid ‘lunatic’ fiscal cliff (money.cnn.com)
- Democrats to Risk Fiscal Cliff by Targeting Top Earners (bloomberg.com)
- More And More People Think That The Next Debt Ceiling Fight Will Be A Catastrophe (businessinsider.com)
- IMF: Deal with fiscal cliff and debt ceiling soon (money.cnn.com)
About dcpetterson (187 posts)
D. C. Petterson is a novelist and a software consultant in Minnesota who has been writing science fiction since the age of six. He is the author of A Melancholy Humour, Rune Song and Still Life. He lives with his wife, two dogs, two cats, and a lizard, and insists that grandchildren are the reward for having survived teenagers. When not writing stories or software, he plays guitar and piano, engages in political debate, and reads a lot of history and physics texts—for fun. Follow on Twitter @dcpetterson