Two Views on the Fiscal Cliff

"You can always count on Americans to do the right thing—after they’ve tried everything else," -Winston Churchill

   Last night as I was battling my computer (trying to make it work), I flipped my television's channel over to MSNBC and discovered that the Republican controlled House of Representatives had passed the Senate's bill to avert the most harsh effects of the so-called Fiscal Cliff. The measure, brought to the House floor less than 24 hours after its passage in the Senate, was approved 257 to 167, with 85 Republicans joining 172 Democrats in voting to allow income taxes to rise for the first time in two decades, in this case for the highest-earning Americans. Voting no were 151 Republicans and 16 Democrats.

   Now all that has to be done is for the President to sign it. As the picture above indicates it looks as if he will be happy to do so.

   As I predicted we did go over the Cliff officially at one second after midnight yesterday. What the House's action accomplishes is to help calm national and international markets, letting them know we aren't completely crazy, and allowing important items such as the Farm Bill to pass, so we all don't have to start paying $8 for a gallon of milk.

   The social security payroll tax holiday was not extended, so workers will see their pay checks shrink to a certain extent, but that was never meant to be a permanent cut anyway, and which was basically robbing Social Security of its rightful income. 

   As it is the Bush Tax cuts will remain in place for 98% of Americans, with those making more than $450,000 having to pay more. I would have liked to have seen that income limit lower, say $250,000 as the President first proposed, but during negotiations, concessions do have to be made, and considering all that was on the table, I can live with what was put through (as if I had a choice).

   Below is two view points on this matter by my two favorite economists, former Labor Secretary, Robert Reich, and Nobel prize winner Paul Krugmam:

Lousy Deal on the Edge of the Cliff, Robert Reich   December 31, 2012

   The deal emerging from the Senate is a lousy one. Let me count the ways:

   1. Republicans haven’t conceded anything on the debt ceiling, so over the next two months – as the Treasury runs out of tricks to avoid a default – Republicans are likely to do exactly what they did before, which is to hold their votes on raising the ceiling hostage to major cuts in programs for the poor and in Medicare and Social Security.

   2. The deal makes tax cuts for the rich permanent (extending the Bush tax cuts for incomes up to $400,000 if filing singly and $450,000 if jointly) while extending refundable tax credits for the poor (child tax credit, enlarged EITC, and tuition tax credit) for only five years. There’s absolutely no justification for this asymmetry.

   3. It doesn’t get nearly enough revenue from the wealthiest 2 percent — only $600 billion over the next decade, which is half of what the President called for, and a small fraction of the White House’s goal of more than $4 trillion in deficit reduction. That means more of the burden of tax hikes and spending cuts in future years will fall on the middle class and the poor.

   4. It continues to exempt the first $5 million of inherited wealth from the estate tax (the exemption used to be $1 million). This is a huge gift to the heirs of the wealthy, perpetuating family dynasties of the idle rich.

   Yes, the deal finally gets Republicans to accept a tax increase on the wealthy, but this is an inside-the-Beltway symbolic victory. If anyone believes this will make the GOP more amenable to future tax increases, they don’t know how rabidly extremist the GOP has become.

   The deal also extends unemployment insurance for more than 2 million long-term unemployed. That’s important.

   But I can’t help believe the President could have done better than this. After all, public opinion is overwhelmingly on his side. Republicans would have been blamed had no deal been achieved.

   More importantly, the fiscal cliff is on the President’s side as well. If we go over it, he and the Democrats in the next Congress that starts later this week can quickly offer legislation that grants a middle-class tax cut and restores most military spending. Even rabid Republicans would be hard-pressed not to sign on.

Perspective on the Deal, Paul Krugman   January 1, 2013

   To make sense of what just happened, we need to ask what is really at stake, and how much difference the budget deal makes in the larger picture.

   So, what are the two sides really fighting about? Surely the answer is, the future of the welfare state. Progressives want to maintain the achievements of the New Deal and the Great Society, and also implement and improve Obamacare so that we become a normal advanced country that guarantees essential health care to all its citizens. The right wants to roll the clock back to 1930, if not to the 19th century.

   There are two ways progressives can lose this fight. One is direct defeat on the question of social insurance, with Congress actually voting to privatize and eventually phase out key programs — or with Democratic politicians themselves giving away their political birthright in the name of a mess of pottage Grand Bargain. The other is for conservatives to successfully starve the beast — to drive revenue so low through tax cuts that the social insurance programs can’t be sustained.

   The good news for progressives is that danger #1 has been averted, at least so far — and not without a lot of anxiety first. Romney lost, so nothing like the Ryan plan is on the table until President Santorum takes office, or something. Meanwhile, in 2011 Obama was willing to raise the Medicare age, in 2012 to cut Social Security benefits; but luckily the extremists of the right scuttled both deals. There are no cuts in benefits in this deal.

   The bad news is that the deal falls short on making up for the revenue lost due to the Bush tax cuts. Here, though, it’s important to put the numbers in perspective. Obama wasn’t going to let all the Bush tax cuts go away in any case; only the high-end cuts were on the table. Getting all of those ended would have yielded something like $800 billion; he actually got around $600 billion. How big a difference does that make?

   Well, the CBO estimates cumulative potential GDP over the next decade at $208 trillion.So the difference between what Obama got and what he arguably should have gotten is around 0.1 percent of potential GDP. That’s not crucial, to say the least.

   And on the principle of the thing, you could say that Democrats held their ground on the essentials — no cuts in benefits — while Republicans have just voted for a tax increase for the first time in decades.

   So why the bad taste in progressives’ mouths? It has less to do with where Obama ended up than with how he got there. He kept drawing lines in the sand, then erasing them and retreating to a new position. And his evident desire to have a deal before hitting the essentially innocuous fiscal cliff bodes very badly for the confrontation looming in a few weeks over the debt ceiling.

   If Obama stands his ground in that confrontation, this deal won’t look bad in retrospect. If he doesn’t, yesterday will be seen as the day he began throwing away his presidency and the hopes of everyone who supported him.


The Ongoing War: The Battle Over the Debt Ceiling,     Robert Reich   January 2, 2013

   "It's not all I would have liked," says Republican Senator Lindsey Graham of South Carolina, speaking of the deal on the fiscal cliff, "so on to the debt ceiling."

   The battle over the fiscal cliff was only a prelude to the coming battle over raising the debt ceiling - a battle that will likely continue through early March, when the Treasury runs out of tricks to avoid a default on the nation's debt.

   The White House's and Democrats' single biggest failure in the cliff negotiations was not getting Republicans' agreement to raise the debt ceiling.

   The last time the debt ceiling had to be raised, in 2011, Republicans demanded major cuts in programs for the poor as well as Medicare and Social Security.

   They got some concessions from the White House but didn't get what they wanted - which led us to the fiscal cliff.

   So we've come full circle.

   On it goes, battle after battle in what seems an unending war that began with the election of Tea-Party Republicans in November, 2010.

   Don't be fooled. This war was never over the federal budget deficit.

   In fact, federal deficits are dropping as a percent of the total economy.

   For the fiscal year ending in September 2009, the deficit was 10.1 percent of the gross domestic product, the value of all goods and services produced in America. In 2010, it was 9 percent. In 2011, 8.7 percent. In the 2012 fiscal year, it was down to 7 percent.

   The deficit ballooned in 2009 because of the Great Recession. It knocked so many people out of work that tax revenues dropped to the lowest share of the economy in over sixty years. (The Bush tax cuts on the rich also reduced revenues.) The recession also boosted government spending on a stimulus program and on safety nets like unemployment insurance and food stamps.

   But as the nation slowly emerges from recession, more people are employed - generating more tax revenues, and requiring less spending on safety nets and stimulus. That's why the deficit is shrinking.

   Yes, deficits are projected to rise again in coming years as a percent of GDP. But that's mainly due to the rising costs of health care, along with aging baby boomers who are expected to need more medical treatment.

   Health care already consumes 18 percent of the total economy and almost a quarter of the federal budget (mostly in Medicare and Medicaid).

   So if the ongoing war between Republicans and Democrats was really over those future budget deficits, you might expect Republicans and Democrats to be focusing on ways to hold down future healthcare costs.

   They might be debating how to make the cost controls in the Affordable Care Act more effective, for example, or the merits of moving to a more efficient single-payer system, as every other advanced country has done.

   But they're not debating this, because the federal deficit is not what this war is about.

   It's about the size of government. Tea-Party Republicans (and other congressional Republicans worried about a Tea-Party challenge in their next primary) want the government to be much smaller.

   "My goal," says conservative guru Grover Norquist, "is to cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub."

   What's behind this zeal to shrink government? It's not that the U.S. government has suddenly become larger. In fact, non-military government spending relative to the size of the U.S. economy remains the smallest of any other rich nation.

   Apart from the military, Medicare and Social Security account for almost everything else the federal government does - and these programs continue to be hugely popular, as Republicans learn every time they threaten them.

   The animus toward government has more to do with the growing frustrations of many Americans that they're not getting ahead no matter how hard they work.

   Government is an easy scapegoat, utilized by much of corporate America to convince average Americans to cut taxes, spending, and regulations - and divert attention from record-high corporate profits and concentration of income and wealth at the top.

   The median wage continues to drop, adjusted for inflation, even though the economy is growing. And the share of the economy going to wages rather than to profits is the smallest on record.

Increasingly it's looked like the game is rigged, especially when people see government bailing out Wall Street (the Tea Party movement grew out of the bailout, as did the Occupiers), and handing out corporate welfare to big agriculture, big pharma, oil companies, and the insurance industry, to name but a few of the recipients.

   The outrage grows when average working people are told - falsely - that a growing portion of Americans don't pay taxes and live off government handouts.

   The battle over the fiscal cliff is over, but the trench warfare will continue.