The fiscal cliff is just Act 2 of a 3-Act Play

2 Jan

I’m still mulling over the fiscal cliff deal that’s just been ratified by Congress.

My one thought so far is that part of the reason some progressives are saying it’s not so bad is that the deal, for the most part, focuses on taxes. And while the deal has the unfortunate element of making permanent a great many of Bush’s tax cuts, which were temporary, and not raising nearly the amount of revenue that might have been raised if the tax cuts had simply been allowed to expire ($3.9 trillion over a ten-year period), it does have the benefit that it raises about $600 billion in revenues, eliminates some tax benefits for the rich (though not nearly to extent that allowing the Bush cuts to expire would have), extends unemployment insurance for a year and protects the earned income tax credit for the poor.

But we have to remember that the deal is really only the second act of what seems to be shaping up as a three-act drama.  Act 1 was last summer, when Obama and the Republicans agreed to nearly $1 trillion in non-defense spending cuts over a ten-year period.  That set of cuts is now in place, promising, as the White House said last summer, to “reduce Domestic Discretionary Spending to the Lowest Level Since Eisenhower.”

Act 2 is the fiscal cliff deal. As I say above, it focuses mostly on taxes, and because it didn’t touch things like Social Security or Medicare, which Obama had been pushing for, some progressives feel relief. But it’s Act 2, as I said. If we keep in mind Act 1, what we have so far is $1 trillion in non-defense cuts and $600 billion in tax increases.

Which brings me to Act 3: the debt ceiling and delayed sequester negotiations that are set to begin in late February/early March. Unlike the negotiations over the fiscal cliff, where Obama simply could take away the Republicans’ tax cuts by waiting them out, the debt ceiling negotiations will put the GOP in a much stronger position. Obama wants something, and only the Republicans can give it to him. So now they’ll say to him: all the movement has to be on the spending side. And aside from the issue of cuts to the Pentagon, he’ll have very little to negotiate with.

Ed Kilgore describes the upcoming confrontation over the debt ceiling/sequester thus:

So the supposed moment of bipartisan satori that supposedly culminated with the House’s action last night has increased the already formidable sentiment within both parties to make the upcoming confrontation One for the Ages. I would guess that by sundown today about 95% of the Republicans in both Houses who voted for the “cliff” bill will have made public statements swearing bloody vengeance on the Welfare State in exchange for an increase in the debt limit. And even before the deal was sealed in the Senate, the president was already vowing not to make the concessions Republicans will demand.

When it comes to intransigence, whom are you going to believe? The Republicans or Obama. That’s why liberals, even those who aren’t that ruffled by the specifics of the fiscal cliff deal, are nervous.

Regardless of whom you believe, all of the action is going to happen on the spending side. So when the play’s over, what we’ll have is $600 billion in tax increases, and some number of trillions in spending cuts. Some of those cuts will come from the Pentagon, which is good, but…well, you see where I’m going.

Update (noon)

Here’s a good roundup of reactions to the deal.

Update (3 pm)

Digby has a must-read. She also makes an important point in her conclusion:

So you see what a bind we’ve been put it with this ridiculous austerity fetish? We’re going to be arguing about cutting even larger chucks of the budget at a time when we desperately need to be adding to it.

(Oh, and by the way, it’s not as if the tax hikes they just voted for could be used for any of that. Every penny of it is slated to pay down debt incurred during the time when the Republicans starved the beast and spent like sailors. What a racket.)

I didn’t deal with the whole austerity question here, though I have in the past. In a bad economy, tax hikes are always austerity measures. But the one hope is that the monies they provide will go to funding programs. In this case, the money is solely to pay down the debt. And if history is any guide, as soon as the GOP is a position to wreak their havoc, they’ll just run up the debt again. Unless someone finally makes the case for taxes as something other than a way of reducing debt and deficits, we’ll be stuck where we are.

22 Responses to “The fiscal cliff is just Act 2 of a 3-Act Play”

  1. Donna Gratehouse January 2, 2013 at 12:04 pm #

    The CBO reported that the extension of 98% of the Bush tax cuts would add $4 trillion to the deficit over the next decade. The White House responded by claiming that you can’t compare it to the tax cuts expiring, you have to compare to the status quo of the tax cuts being in place. http://www.whitehouse.gov/blog/2013/01/01/american-taxpayer-relief-act-reduces-deficits-737-billion

    By “disappearing” that $4 trillion in that way, the WH can now claim a $737 billion *reduction* to the deficit in the deal. This is wrong on two counts IMO: First, the Bush tax cuts were supposed to be temporary. Second, since they’re planning to do massive cuts to domestic spending in the name of the Almighty Deficit, the fact that they deliberately took $4 trillion in revenue off the table should be part of the discussion.

  2. The Raven January 2, 2013 at 1:13 pm #

    This split the House Republicans. They might, as you say, all vow vengeance…or they might just throw out the traitors, who would then have little choice but to form a coalition with the Democrats, or perhaps even switch parties.

    Not good for progressives, no. But perhaps better for the USA, which would at least be able to reliably make budgets.

  3. Steve S. January 2, 2013 at 1:37 pm #

    “the unfortunate element of making permanent a great many of Bush’s tax cuts, ”

    That’s really all that needs to be said about The Deal. The rich won, big time.

    Capital gains were taxed at 15 and 28% as recently as 1997. Now it will be 15 and 20%.

    Dividends were taxed like ordinary income as recently as 2002. Now it will be at capital gains rates.

    Estates were taxed at a top rate of 55% with a $675k exclusion. Now it will be a 40% top rate with a $5 million exclusion.

    The only place where their victory is small is income tax rates.

    So the wealthy have successfully etched in stone several trillion dollars in tax savings and the deficits that are supposedly being solved by this process are nowhere near solved. The liberal-left can tote up the brownie points for the political parties if they want, I personally don’t see the point. Shake the hands of the country club members and congratulate them on the victory, then get ready for the next round.

  4. Chip Daniels January 2, 2013 at 7:33 pm #

    But nothing is ever permanent, or etched in stone, nor is anything ever temporary, unless the future Congress wants them to be.

    A 2014 or 2016 Congress could raise taxes and spending if it wanted- or rather, if the American electorate was willing to let them.

    Right now, Obama has managed to get the Tea Party to vote for raising taxes, even if they were not nearly high enough or broad enough.

    I count that as a win.

    • David Kaib January 3, 2013 at 9:39 am #

      I understand your point, but I think it’s a misfire. There is obviously a difference between two status quos where a) a president 2) a House majority 3) a House leadership 4) a Senate leadership 5) a Senate majority or 6) a Senate minority, can prevent a change. A ‘temporary’ measure can be ended by any one of these things. To change a ‘permanent’ one requires making it past all those gates. These simply aren’t the same.

      You can say political points were scored (although it’s not clear to me what the value is) but that is a separate question.

      Lastly, the issue here isn’t the public, which broadly supports tax increases on the rich and corporations. In addition, most people are willing to pay more themselves as long as it’s going towards things they care about (as opposed to paying down the debt). As a general rule, the influence of an unmobilized public is negligible, while the power of the funders is what drives the system.

      • gkhanna1 January 3, 2013 at 10:47 pm #

        I think one major (and lasting) contribution both the Obama campaigns have shown is how to mobilize the public in a meaningful way. I have never seen so many people get involved in a presidential race – friends, neighbors, etc. Plus, he raised the bulk of his money through small dollar donations — it was very impressive. My feeling is that everyone else will catch on eventually.

    • Steve S. January 3, 2013 at 12:14 pm #

      Consider the Deficit Reduction Act of 1993, which is the last time something like what you describe happened. The partisan makeup was roughly the same as from 2009-11. That bill just barely, and I mean barely passed and Congress was rewarded by being voted out in a wave the next year. So yes, if you can reproduce a huge partisan majority for the Dems plus the social and political climate of 1993 such a thing might happen again. More likely, that was a once in a lifetime event.

      That’s not to say that our elected leaders might not find ways to nickel and dime more revenue out of us, but I don’t think such efforts will hew closely to Sutton’s Law for the foreseeable future.

  5. gkhanna1 January 2, 2013 at 11:33 pm #

    It is unfortunate but typical that little breaks and perks get slipped into larger deals. The problem I see with all this discussion is that I think everyone forgot what it means to compromise. When all is said and done, I’m not sure anyone will “win” . When the next “fiscal cliff”-like deadline approaches, it will be focused more on spending cuts because the tax side has now been largely settled. Obama has already said (and put forth some numbers) on cuts/slower growth in Medicare and Social Security spending. He’ll have to convince the Democrats go along. Of course, the Republicans will want deeper cuts — but there will have to be a middle ground somewhere.

    • donnadiva January 3, 2013 at 6:25 pm #

      Compromise is one thing. It’s quite another to embrace bad ideas like austerity in the midst of a recession. That’s what I see the President and other Dems doing and it causes them to start from a position that’s halfway to the other side. We should be arguing to expand social programs and for Keynesian stimulus and compromise from that position.

      • gkhanna1 January 3, 2013 at 10:40 pm #

        I agree that steep austerity in the face of an uncertain economy (and slow growth) is a bad idea. Just ask the Europeans. That said, in my opinion slowing social programs is not the same as “austerity”. If we do this right, it will be possible to slow the growth from entitlement programs and this will free up a lot more room in the budget for stimulus / investments that we should make (clean energy, next gen manufacturing, etc.).

      • donnadiva January 4, 2013 at 12:13 am #

        So you’re arguing that we need to slow social and entitlement programs because we’re currently too generous to the poor, elderly, and disabled?

      • gkhanna1 January 4, 2013 at 10:08 am #

        donnadiva — respectfully, no — that is not my argument. Limiting the growth of entitlements is necessary to make sure these programs 1) survive to give benefits for the tsunami of people who will need them in the future and 2) we don’t get into a position where the entire federal government’s budget gets overtaken by this. On one level, this comes down to a problem of arithmetic. On a personal level, I have many elderly family members (including my parents) who depend on Medicare, SS, etc. — and I have seen how critical these are to being able to sustain them. From the Democrats point of view, they should realize they’re better off getting ahead of the game and manage these “cuts” now rather than be forced into drastic cuts later. It requires a lot of courage to break from orthodoxy (i.e., we are balancing the budget on the back of seniors and the poor) and explain why these are necessary and how they can be done in a gradual way. Obama has already put these cuts on the table as part of the (failed) “grand bargain” discussions — twice! Real leadership will mean he has to get his party to go along.

      • Bill Murray January 4, 2013 at 9:28 pm #

        GKHanna, what you are saying about earned benefit programs is wrong, unless the upcoming austerity measures destroy the economy. SS really doesn’t have any significant problems (http://www.angrybearblog.com/2013/01/three-definitions-of-solvency-for.html). Medicare is harder to say much about because CBO has not been acting in an impartial fashion like it’s supposed(http://www.bancaditalia.it/studiricerche/convegni/atti/fiscal_sustainability/session_3/Follette%20Sheiner.pdf)

      • gkhanna1 January 10, 2013 at 2:54 pm #

        Bill — I am happy to stand corrected in the face of compelling data. But the links you sent don’t convince me that SS doesn’t have significant problems. Yes — it shows a surplus today, and (by law) can only pay out what is in the trust fund. But eventually the SS trust fund will have to collect all the surpluses it has “loaned” to the government. This accounting gimmickry we have been doing will eventually catch up. Secondly, regarding Medicare — it is a fact (acknowledged by all sides in this debate) that the outlays have been growing faster than any other major category of government spending. And there is nothing on the horizon to slow this. I put some charts in my last blog post (you can skip towards the end of this: http://options-trading-notes.blogspot.com/2012/12/how-i-learned-to-stop-worrying-and-love.html) showing the growth of these entitlement programs.

        The bottom line is that the mathematics of the budget deficits are stark — how much more can we possibly raise taxes to solve the problem. I consider myself a loyal Democrat (and somewhat liberal, whatever that means) — and I put my money where my mouth is supporting candidates. Still — I will break with my party’s orthodoxy and say that we have to curb entitlement spending one way or the other. Do I like it? No. Will it happen? Probably. Keep in mind that Obama has already put entitlement cuts on the table — twice.

  6. gkhanna1 January 2, 2013 at 11:38 pm #

    By the way, if you’re interested in a somewhat different view about the fiscal cliff, please feel free to check out:

    http://options-trading-notes.blogspot.com/2012/12/how-i-learned-to-stop-worrying-and-love.html

    (lengthy read, written before the deal reached yesterday, but hopefully will make you appreciate why we need more fiscal cliff-like deadlines)

  7. JonJ January 3, 2013 at 5:32 pm #

    It’s important to make sure that everyone left of center realizes that we’re still in a very bad political situation, just as we have been for years, and Obama’s reelection doesn’t change that fact at all. But I think just about all of us realize that already. Some lefties have gotten sick to death of that realization, and want to celebrate every tiny piece of evidence that things aren’t as horrible as they could be, and have been now and then in the past; hence the murmurs that “it’s not all that bad” that are being heard.

    But I agree with some people’s analysis that our big problem is that a fairly large part of the population (not a majority by any means, but pretty large) is composed of bloody-minded fools, who support “Tea Partiers” in Congress, and it’s these damned Congresscritters, and the voters who put them into power, who are the basic problem at this point. It’s like a family with a couple of members who stink up the whole joint, but are in perfect health and not about to die off, so what can you do with them? You can argue that if Obama were different from what he is, he could have negotiated a better deal on this bill, and would do better in the upcoming negotiations, but he is what he is, and we are where we are.

    There are a lot of Americans who are rather complacent and apolitical, and there are others, concentrated especially in the Southern and some Western states, who really ought to go ahead and secede so we don’t have to deal with them any more. But that’s not going to happen, so we on the left just have to figure out how to neutralize their political power if we are ever going to get anything done. Until someone explains to me how that will be accomplished, I’m not terribly interested in lefties’ political analyses, which are mostly impractical tearings of hair and rendings of garments at this point.

    • donnadiva January 3, 2013 at 6:22 pm #

      I feel you, JonJ. The only answer I have for how to deal with the fools is to outvote them. When our people show up at the polls we win.

    • gkhanna1 January 3, 2013 at 10:40 pm #

      Amen to the part about showing up to vote!

  8. paul January 4, 2013 at 8:19 pm #

    Corey you have excellent instincts on this issue. Might I suggest you check out the MMT people who have been making this point for years. They could use an alley with your facility in argument and clear thinking. I like L. Randall Wray and Bill Mitchell.

  9. Jim K January 9, 2013 at 7:26 am #

    I’m afraid it’s a final, suicidal cliff dive for Obama and the Dems. See my take on this at http://www.thepolemicist.net/2013/01/obamas-cliff-dive_9.html .

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