Monday, December 31, 2012

Going over the cliff

by Cliff Thies

I'm not sure the President was actually opposed to going over the cliff. I think, all the while, what he wanted was to blame the Republicans for taxes going up, for the soft economy, and for the inflation that's coming.

The "cliff" refers to the expiration of all the "temporary" tax cuts and such that Congress routinely extends one year at a time so as to not appear to break the budget. This is because of the way the budget works. A permanent tax cuts "costs" five times as much as a temporary tax cut. So, each year, the Congress extended for one year an increasingly long list of "temporary" tax cuts ranging from the so-called Bush tax cuts, to the R&D tax credit, to extended unemployment benefits, to extra-generous earned income tax credits and food stamps, to the milk price support program, to realistic health care reimbursement schedules (which, in Washington, is called the Medicare "fix"). The cliff also refers to an across-the-board 10 percent reduction in defense and discretionary domestic spending (from the levels they would otherwise be, the actual reduction in spending would be much smaller).

Then, when the Democrats took over the House and Senate after the elections of 2006, the Congress stopped enacting budgets, and instead operated the government by a series of "continuing resolutions." These continuing resolutions included, among other things, extenders of the temporary tax cuts. Along with the funding of new programs, routine increases in military and domestic discretionary spending, and automatic increases in the entitlement programs, the deficit ballooned to the trillion dollar level during Bush's last year in office, where it has stayed during the Obama's tenure.

When the Republicans took over the House after the elections of 2010, it (the House) started passing budgets again (i.e., the Ryan budget). But, in 2011, not one Democrat in the Senate voted for any budget, not the President's, not the House budget, and not Senator Rand Paul's budget. One Republican joined the Democrats in being unable to wrap her head around the idea that it was her job to make the critical decisions required by a budget.

Without a budget and faced with the prospect of hitting the debt ceiling, the President and Congress joined in negotiations of a grand deal. At one point, it was reported that President Obama and Speaker Boehner were close to this grand deal. The key element of the deal, supposedly, was an agreement to incorporate reform of the income tax, as recommended by the President's own Debt Commission (i.e., the Simpson-Bowles Commission), to raise the amount of additional revenue the President wanted without raising tax rates, which was the Republican priority.

Whether or not the President and the Speaker were close, in the end they only thing they agreed to was to kick the can down the road, until after the elections of 2012. To allay the concerns of the bond markets for continuing trillion-dollar deficits, the increases in taxes and reductions in spending referred to as the cliff, were made part of the deal. The idea was that whoever won the elections would decided how, better, to reduce the deficit. Except, that in the election, the American people returned a Democratic President and a Republican House, returning us to the original impasse as to how to reduce the deficit.

As to whether it is possible for the President and the Speaker to agree to a compromise is uncertain. This is because each would have a problem with members of his party. On the Republican side, the Speaker might be able to get a majority of his fellow Republicans to go along with tax increases on income above $1 million, in a package that addressed some Republican priorities as well as avoid the cliff. But, would there be enough Democratic votes to pass the measure? On the Democratic side, it is not clear Senator Reid, the Democratic leader in the Senate, could get a majority of his fellow Democrats to agree to any budget.

Plus, it is not clear that going over the cliff would be a bad thing.

Going over the cliff would raise real money, way more than would be raised by tax increases on the rich only. Plus, it would actually cut spending. Possibly, the Congress could make a few, high priority restorations of spending (especially if these are accompanied by off-sets). The budget deficit would be cut in half by the combination of big tax increases borne by everybody who pays taxes to the federal government, and by actually cutting federal spending by a few billion dollars, instead of allowing spending to continue to increase at an unsustainable rate.

The actual facts of going over the cliff suggest that what's coming out of Washington is politics and not serious economics, each side trying to blame the other for the tax increases that are needed to pay for a federal government that is now about 25 percent of GDP, when before Obama it used to be about 20 percent of GDP.


Rita said...

Breaking: No deal yet. And the GOP better not cave in.

The Right Guy said...

The GOP almost always caves in.