In the U.S., pundits cannot resist the fiscal cliff metaphor: it’s colorful, punchy and easy to understand. It’s just two words long. What’s not to like?
It’s not true.
The metaphor assumes that if Republicans and Democrats fail to reach an agreement on the budget by the end of the year, the U.S. economy falls over a cliff, crashes, and burns. The “cliff “metaphor complements the equally imaginative “iceberg metaphor” that some fear-mongers use to portray the deficit. (Think Titanic)
It’s all a bit more complicated than the metaphors suggest.
What few conservatives mention is that the deficit has already begun to dissolve: since 2009 the deficit has fallen from 10% of GDP to 7% in the fiscal year that ended on September 30th. By historic standards this is still enormous, and must be addressed. But the numbers demonstrate that, over time, we can reduce the deficit without renting the nation’s safety nets.
As for the cliff, there is no precipice—just an imaginary line, drawn in the sand, as Republicans and Democrats play “chicken.”
The Economist understands all of this. The lead story in the most recent issue focuses on the “cliff” and points out that “worries” about what will happen if we go over that precipice are “understandable” but “overblown.” The “risk of economic catastrophe is minimal.” Any damage would be short-term.
I don’t always agree with the Economist: the UK publication has its own sometimes eccentric slant on things. But on the whole, it is a thoughtful publication—well-researched and fact-checked. Moreover, in this case, distance may give the Economist a perspective on the problem that some in the U.S. lack.
Exaggerating the Threat to the Middle-Class
The analysis suggests that Democrats don’t dare just stand back and let Bush’s tax cuts expire– as they will if party leaders don’t reach a settlement by year-end: “Only a small handful of policy voices on the left are making the case for the tax cuts to fully expire. In part, that is because the economy is still growing slowly, and tax increases have the potential to weaken it.” But it is also because “If the two parties fail to come to a deal by Jan. 1, taxes on the average middle-income family would rise about $2,000 over the next year. That would follow a 12-year period in which median inflation-adjusted income dropped 8.9 percent, from $54,932 in 1999 to $50,054 in 2011.”
This assumes that once we miss the January 1 deadline, tax hikes for the middle-class would become permanent—which, of course, is not true. Talk about how much more a family would pay over the course of 2013 falls somewhere between hyperbole and hysteria, ignoring what everyone knows:
“If the Bush tax cuts expire, Democrats will presumably simply propose to restore them in January for those [families] earning less than $250,000,” the Economist observes, “daring Republicans to block them.”
What Happens If Politicians Miss the Dec. 31 Deadline?
The Economist acknowledges that if politicians did not extend the tax cuts early in 2013 “the consequences of prolonged stalemate would be so disastrous,” and “this is precisely why” there will be no prolonged stalemate.
“Either towards the end of December, or early in 2013, Mr. Obama and the Republicans in Congress are likely to reach an agreement that avoids most of the tax increases and spending cuts, and raises the debt ceiling. Elements of that deal are becoming a little clearer: the Republicans seem to have given in to Mr Obama and accepted that wealthier Americans will have to pay more tax.” s
Yes, it is now clear that those in the top 2% will pay higher taxes (how much higher, I don’t know), while the remaining 98% will keep their tax cuts.
The Economist goes on to explain that whether a deal is made before the end of the year, or early in 2013, President Obama (and the middle-class voters who elected him) will be the winners. “Republicans have little leverage of their own.”
Early in 2013, only Tea Party extremists would dare to try to block legislation extending tax cuts for the vast majority of Americans. Republicans know they need to broaden the GOP’s base, and this is not the way to do it. Indeed, polls already reveal that if politicians miss the deadline, the public will blame Republicans . Democratic House Leader Nancy Pelosi recognizes this—which is why she looks forward to bring the tax cuts to a vote in the House.
The Debt Ceiling
What could Republicans possibly do to try to gain some leverage? The Economist reports that “Some Republicans have suggested giving up the fight on tax rates, and instead insisting on entitlement cuts as the price of raising the debt ceiling, which the Treasury is expected to hit in February or March But Democrats consider that an empty threat; if the Republicans don’t want to be blamed for a recession-inducing rise in tax rates, they certainly do not want to be held responsible for a panic over possible default.”
If Republicans were foolish enough to refuse to lift the debt ceiling, we could expect that this nation’s credit rating would be cut further. Meanwhile, the global financial community would blame bloody-minded Republicans on the far right who they consider far less rational than President Obama.
But again, what can’t happen won’t.
The Congressional Research Service reports that since March 1962, we have raised the debt ceiling 74 times. Safe to say we will do it again. (There are better ways to deal with debt and government spending, but waiting until the last minute and cracking our heads on the ceiling is not one of them.)
As The Economist notes: “These dynamics all work in favour of a deal, largely on Mr. Obama’s terms.”
Yesterday Republican House Speaker John Boehner declared that that the White House seems willing to “slow-walk our economy right up to the fiscal cliff.” . Boehner is right. And if President Obama has to cross the line and take us down that slope, I believe he will.
If that happens, no doubt there will be much Chicken-Little talk in some quarters. The media will feed on the story. But at that point, the pressure on Republicans to compromise on government spending and taxes would be enormous. There should be no lasting damage– except to the GOP.
What You Probably Don’t Know About the Deficit
We are told that the cliff is so steep because the iceberg (i.e. the deficit) is so huge. Few fear-mongers mention that the deficit has been falling (as a percent of GDP) for the past three years: Again, the Economist offers the facts: “America’s deficits have exceeded $1 trillion for four years in a row. Though the deficit has fallen from 10% of GDP in 2009 to 7% in the fiscal year that ended on September 30th that is still higher than in any year since 1946. The figure should shrink in the years ahead as the economy recovers. URL But if there are no changes to the current path of taxes and spending, the Congressional Budget Office reckons it will start rising again in 2019, hitting an unaffordable 7% by 2023 as the mounting cost of health care and pensions begins to swamp the budget.”
Make no mistake: the deficit remains extraordinarily high. But the fact that has begun to melt shows that over time, we can shrink it.. This is how deficits are reduced: it is a process, not an event.
We must make sure this happens, but we don’t have to panic. As I noted in a recent post, at the end of the 1990s, we were running a surplus, despite “entitlement programs.” Medicare and social security didn’t cause the deficit: tax cuts for the rich, two wars, and banking deregulation that led to the subprime mortgage crisis created a heap of debt. These mistakes can be reversed
Meanwhile, President Obama recognizes that, as the population ages, we need to slow healthcare spending. In this latest round of negotiations he has proposed cutting fees to drug manufacturers, hospital, and nursing homes. Note: he is not backing across the board cuts in what Medicare pays doctors, nor is he willing to reduce benefits for seniors.
Yesterday, I tweeted an AP report that, according to Senate Majority Whip Dick Durbin the White House is no longer considering raising the Medicare eligibility age as part of fiscal cliff talks The deal is “off the table.” Today, other news sources are confirming that this is what Durbin told reporters.
What is President Obama willing to do to rein in Medicare’s outlays? His proposals mirror some of the excellent suggestion in a Campaign for American Progress report that I wrote about a few days ago. / The brief, which is titled “Senior Protection Plan” proves that it is possible to save more than of $385 billion over 10 years–without inflicting pain on Medicare beneficiaries. Over the long term, the plan would do what we most need to do–bend the curve of Medicare inflation.
Remember, the Affordable Care Act has put us on the path to deficit reduction. Already, Medicare spending is slowing.