The Fiscal Cliff: I Say Nothing Ventured, Nothing Gained

There used to be a saying when I was younger, stronger, smarter, and had more stamina that went something like, “Nothing ventured, nothing gained.” I think what we’re going to see post-election would be better to consider as, “Nothing Done, And Your Ass is Mine!”

In the immediate aftermath of what, by most accounts, is going to be a hum-dinger of an election day come November 6th, is an event that has gotten little if any airplay by the main-stream media since the political party conventions. But it’s my opinion that the American public has absolutely reached the snapping point when it comes to “My way or the highway” Congressional brinkmanship

The Foreboding Fiscal Cliff  

The very concept of a “fiscal cliff” suggests that the country is approaching a catastrophic drop-off at the end of the year, and that it would be the equivalent of financial suicide to jump off.

But a group of economic policy experts( and more Democrats than one might imagine), insist that letting the Dec. 31 deadline come and go (triggering automatic tax increases and spending cuts ) could produce the best outcome for the country. Any real fix to our long-term debt and short-term slow growth would be about a nuanced as a Louisville Slugger to the mid-section. My own One Penny Solution (Financial Transaction Tax) goes even farther and is better compared to a sledgehammer. But it would work. And it would be hated by Republicans and Democrats. Now that’s my kind of Economic Plan; one that every politician will hate.

Once the tax hikes take effect, Republicans will find it increasingly difficult to roll them all back and would have to accept a deal on taming the deficit that contains more new tax revenue than GOP lawmakers want. The added fact that it will thoroughly piss-off Grover Norquist and reduce the normally immune military budget would just be icing on the cake.

Like some policy analysts and legislators, I say we should not only go over the edge, but jam Congress to do it.

William Gale, an economist at the Brookings Institute and former adviser to George H.W. Bush drools like a Saint Bernard at a Fourth of July picnic, “It will be much easier to negotiate a budget deal by going over the cliff,” he said. Adding, “It seems to be the only way we can boost revenues.”

“The willingness to go over the cliff is a means to force a deal,” said Matt McAlvanah, a representative for Sen. Patty Murray, the fourth-ranking Congressional Democrat. In July, Murray said she would rather push the debt debate into next year rather than reach a deal “that throws middle class families under the bus.”

Other prominent cliff-jumpers include MSNBC cable host and former Senate Finance Committee chief of staff Lawrence O’Donnell, who’s launched an “Off the Cliff” campaign to press Democrats to jump; and Robert Greenstein, president of the Center of Budget and Policy Priorities, who says going over could be the “least bad” option.

Most Democrats haven’t gone as far as Murray, at least on record, continuing to stress that avoiding the fiscal cliff is their priority. But privately, some concede that they’d be willing to if Republicans refuse to let Bush-era tax cuts on the wealthy expire. Of course, GOP leaders have vowed to preserve the Bush tax cuts for the top income brackets and everyone else despite a lot of fuzzy math.

It’s hard enough to gauge what voters will decide on November 6th, much less what they would want Congress to reach a reasonable deal before the deadline. But by most accounts, they are skeptical that will happen, given the politics surrounding the fiscal cliff.

January 1st, individual tax rates would go up automatically. The top 1 percent of households face some of the largest tax increases in 2013 and would see their after-tax incomes fall by 10.5 percent if Congress does nothing. That would translate to an average tax increase of $120,537 for that group.  A typical middle-income household earning between about $40,000 and $60,000 a year would see a tax increase of about $2,000. The average federal tax rate, including all taxes, would reach 24.3 percent, up five percentage points.

However, once the increases automatically take effect, Congress would technically be voting to cut them rather than raise them. It’s a distinction that the cliff-divers believe will make all the difference. Republicans wouldn’t have to violate their ‘no new taxes’ pledge, and the politics would appear to be a lot easier and the incentives are a lot stronger under that scenario.

Adding to the equation, President Obama promised to veto any legislation that kept the cuts for the wealthy intact and the Republicans don’t have the votes to override unless the November 6th election goes full-tilt for Republicans. One could suppose that a whole new set of circumstances take effect should Mr. Romney win the election, but for now, I’m guessing he won’t.

Political Squabbling Might See Americans “Release the Hounds”

I haven’t heard anyone publicly deny that the fiscal cliff would deal a severe blow to the economy. The potential is certainlythere for it knocking the US back into a recession if the spending cuts and tax hikes remain in effect for all of next year. But advocates say the immediate risk is exaggerated.

The CBPP points out that most of the changes at the bottom of the cliff would be gradually phased in, favoring a “fiscal slope” to allay fears of an immediate economic day of reckoning. They also stress that some of the tax and spending changes could be reversed retroactively, and the Treasury Department also has discretion to stave off changes to withholding tables for payroll taxes.

“It’s not as though we reach January 2 without having addressed the cliff, and we’re in a recession,” said Josh Bivens, research and policy director of the Economic Policy Institute.

“People talk about a grand bargain—a short-term stimulus and long-term deficit reduction when the economy is stronger—that’s the gold standard, and you don’t get that from panicking prior to January 1,” said Chad Stone, an economist at the CBPP.

Making a hasty deal could involve unwanted trade-offs, for instance changes to Social Security, Medicare and Medicaid; groups with strong advocates who would oppose any such reductions–loudly. Of course defense contractor lobbyists would be in a tizzy as well.

They also warn against a short-term fix of “extending everything for a little while, then revisiting the issue later,” as Stone put it. Doing so would forgo an opportunity to force Congress into making tough choices, while encouraging them to continue an detrimental status quo on taxes.

While no one seems to think Dec. 31 is a drop-dead deadline, neither does anyone believe that Congress has a lot of time: Most say Congress has a few weeks, at most, to work out an acceptable deal before the fiscal cliff starts to do bona fide harm to the economy and the markets. We won’t go over the fiscal cliff for very long. And whichever side seems to be the one that’s uncooperative or ideologically obstinate will be reminded of that mercilessly in the 2014 mid-term elections.

Critics of the cliff-jumpers, however, argue that they are being too upbeat about going over the  December 31 deadline.  There is also consensus doubt that Congress would come together as quickly in early 2013 in such an atmosphere of political brinksmanship. “It strikes me as a bit of a blasé attitude,’” said Michael Hanson, chief US economist for Bank of America Merrill Lynch Global Research.

Hanson predicts it will actually take much longer than the proponents imagine to strike a deal if we pass the deadline. And by that time, considerable damage would be done to growth, the stock markets, and consumer and business confidence. “It definitely increases the chance of having one quarter if not two of negative growth,” he said.

The contentiousness of the November 6th election may resemble a cake walk if this new Congress starts off on the same foot that the last one ended on.

It’s my non-scientific opinion that the American public well vent some serious displeasure at Congress should they start with the partisan bickering again; and I’m talking a 5-million-man-lynch-mob-march-on-Washington type venting.
Harvey Gold

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