Wednesday, January 02, 2013

Well, we may not go off the "fiscal cliff" just yet ... but the crisis is far from over

Right up to the last moment, it seemed most likely that 2012 would end without a deal between the White House and the Congressional Republicans to avoid going over the so-called "fiscal cliff".  That's become the shorthand term for the simultaneous expiration of all the Bush tax cuts; the onset of across-the-board spending cuts that were pre-scheduled, in the hope they would never actually take effect, as part of the negotiated solution to the (artificial Republican-engineered) debt ceiling extortion crisis of 2011; and the ending of various temporary measures enacted over the past four years, including a payroll tax cut, emergency unemployment extensions, etc. This combination threatened to trigger a sudden contraction of the federal deficit (not an increase in the deficit, as most of the public seems to believe), so it would be more accurate to describe it as an austerity bomb than a fiscal cliff.

When I wrote about this on December 28, I was sufficiently careful, or cautious, to say that we were "almost certainly" about to go off the fiscal cliff.  I acknowledged the hypothetical possibility of a last-minute stopgap solution that would postpone the full-scale detonation of the austerity bomb for a little while.  I didn't expect that to happen, but it did.  On December 31 a last-minute deal was worked out between the White House and the Senate Republican leadership (the House Republicans having bailed out before Christmas).  This deal resolves some of the key issues—mostly having to do with tax issues, along with extension of emergency unemployment funding and a few other odds and ends—while evading and postponing others.  Ezra Klein has a run-down of its provisions here.

Technically, the deal came too late to keep the country from going over the fiscal cliff.  The compromise package was not passed by the Senate until after midnight on January 1, and the House didn't vote on it until the evening.  For much of the day, in fact, there seemed to be a genuine possibility that the House Republicans might scuttle the whole arrangement; and in the end almost 2/3 of them voted against the Obama/McConnell deal, 151-85.  But the Republican Speaker, John Boehner, brought up the deal for a straight yes-or-no vote despite the fact that most of his caucus would oppose it, which marks a departure from what has become standard Republican practice.  So the Obama/McConnell compromise was passed largely by the House Democrats, many of whom gritted their teeth and voted for it despite severe reservations, along with a minority of the Republicans (including Boehner but excluding some other prominent figures in the House Republican leaderhip).

So why were Obama and Mitch McConnell (aka Dr. No) willing and able to make this deal?  Part of the reason is that although the Senate Republicans are certainly extremist, intransigent, and monumentally irresponsible, most of them are not quite as crazy as the predominant bloc of House Republicans. So when the chips were down, they were willing to break the decades-long Republican taboo against raising any taxes for any of the wealthiest Americans.  Whatever their own commitments in this matter, they recognized that public opinion is overwhelmingly against them on this issue, and they were aware of all the polls indicating that Republicans would get most of the blame if they caused taxes to go up for 98% of Americans in order to protect lower taxes for millionaires.

The other reason is that in the final rounds of negotiations Obama and his administration made some major concessions that they, and the rest of us, will probably come to regret. One glaring example is the fact that, although income taxes will go back to Clinton-era rates for some of the wealthiest taxpayers, this will affect only the top 1% (roughly speaking), not the top 2%—which was already a pretty minimal proposal.  (Meanwhile, since the Republicans refused to extend the temporary cuts in payroll taxes enacted as an economic stimulus measure, payroll taxes will now go up a few percentage points for almost all of the bottom 98% of taxpayers.)  Obama and his team also caved in to the Republicans on maintaining preferential tax rates for dividend income and capital gains, accepted a bad deal on estate taxes, and so on.  Why did they make these and other significant concessions? Was it because Obama and his administration are more moderate, more willing to compromise, and less rigidly intransigent than the Republicans, or because they're simply more timid?  The answer probably involves some combination of all those factors, and there are already heated arguments about the details of how this happened—and about the larger substantive question of whether, on balance, making this deal with McConnell was better for the public interest than the realistically available alternatives, or a monumental blunder, or something in between.

We won't be able to fully assess the consequences of this deal until we see how events play out over the rest of 2013.  But in the meantime, it's important to be clear about some crucial things that this deal did not do.  The automatic spending cuts were not addressed at all, and although the Obama administration wanted to postpone them for another year, the Republicans would only agree to a two-month postponement.  So we can expect several more months of political crisis as that deadline looms closer.  And the deal did nothing to resolve the question of raising the debt ceiling, which is another bomb set to detonate in just a few months. As the dissident fiscal-conservative Republican economist Bruce Bartlett correctly insists, "The Debt Ceiling is the Real Fiscal Cliff".  And leading Republican figures have openly threatened to plunge the country into yet another political crisis, with the potential for real financial disaster, every time the debt ceiling comes up for renewal.

In short, the "fiscal cliff" crisis is far from over.  There has been a temporary reprieve, but the US economy is still hanging over the edge by its fingernails.  (Or, to use another image, it's still tied to the tracks with the Republicans bearing down on it in their locomotive.)  Stay tuned for the next episode ...

=>  As I said, it will be a while before we can fully assess the consequences of this Obama/McConnell deal.  But for the moment I feel inclined to agree with the skeptical assessment offered by John Cassidy (and others who have argued along similar lines).  Some highlights:
It’s a shoddy compromise that does credit to nobody involved, and it raises questions, once again, about President Obama’s willingness and ability to face down the Republican extremists.

About the best that can be said of the deal is that it avoids a hasty shift towards big spending cuts, which could endanger the recovery. But that’s only because the deal punts most of the big questions about federal spending into 2013, when the G.O.P. ultras will be eager to exploit the fact that the Administration once again needs their support to raise the debt ceiling. Anybody who was hoping that the fiscal-cliff negotiations would settle the issue of deficit reduction for the next ten months, let alone the next ten years, will be disappointed.

Come February or March, when the debt ceiling will be breached, we could well be back to the summer of 2011, with the G.O.P. holding the economy hostage and demanding big cuts in Social Security and Medicare. The President has said that he won’t negotiate with the Republicans over the debt ceiling, but will he have any choice? Even before that showdown, there will be questions about the concessions that his negotiators made to reach this deal. [....]

In order to prevent a few days of confusion and possible turmoil in the markets, the Administration agreed to raise the income threshold at which the higher top rate kicks in, from $250,000 to $450,000. (For individuals, it will be $400,000.) That was a big concession. [....] The median household income is about $50,000 a year. Four out of five American families earn less than $100,000 a year. Fewer than one per cent of households earn more than $450,000.

Having lambasted the Bush tax cuts as reckless when they were first introduced, Obama and the Democrats have now conceded that, under no circumstances, should anybody but members of the one per cent—the very richest Americans—be asked to pay higher income tax rates. [....] It virtually concedes the Republican argument that, going forward, the burden of deficit reduction should fall on spending cuts.

And that wasn’t the only surrender on the White House’s part. In giving up on extending payroll-tax cuts it introduced in 2010 and 2011—a concession it made weeks ago—it gave lie to the claim that middle-class families won’t face a tax increase. For the past two years, American workers have been paying two percentage points less than usual in payroll taxes. Now the rates will go back to normal. For a family earning $60,000 a year, this will mean a tax hike of about a thousand dollars.

Taken in isolation, there were sound reasons for restoring the payroll tax to its normal level. (The proceeds are used to pay for Social Security and Medicare.) But the feeling grows that, somehow or other, President Obama didn’t make the most of the situation he found himself in. In addition to raising the top tax threshold, he agreed to a very modest raise in the tax rate on dividends and capital gains—from fifteen per cent to twenty per cent. If the Bush tax cuts had been allowed to expire, dividends would once again have been treated as ordinary income, which means that the very rich—who receive most of them—would have paid a rate of 39.6 per cent.

That’s a big plus for the one per cent, as is the agreement to exempt the first five million dollars of inherited wealth from the estate tax. (In the old days, the exemption was $1 million.) And in an even bigger win for the members of the 0.001 per cent, there doesn’t appear to be any mention in the agreement of eliminating the earned-interest deduction used by hedge-fund and private-equity managers, or of enforcing the Buffett rule. So much for cracking down on the loopholes enjoyed by Mitt Romney and his cronies.

To be sure, the Republicans in Congress aren’t easy to deal with, and, as I said earlier, Obama didn’t have as much leverage as it first appeared. But he always had the option to walk away from the talks, let the Bush tax cuts expire, and then sit down after the New Year with the Republicans and talk about restoring some of them on a selective basis in return for an extension of the debt ceiling. Unfortunately—and this was something I noted early on—the President never really appeared willing to play this card, which encouraged the G.O.P. to be its obstreperous self. [....]
To be fair to Obama and his team, one could make a plausible argument that they were right to worry that failing to reach any deal at all (which might have set off mass hysteria in the financial markets) was risky enough that it was worth making major concessions to avoid it, despite the fact that doing this strengthened the hand of Republican extremists. That kind of argument may or may not be correct, but as far as I can tell, it's worth considering. And whatever criticisms of Obama and his team one might want to make, it's important not to lose sight of the really crucial point here: fundamentally, the Republicans are the problem ... and the fact that they retained control of the House in the latest elections (mostly due to gerrymandering) significantly undermined the possibility for any constructive solutions.

Nevertheless, any informed citizen with a serious concern for the public interest (and I'm not restricting that to Democrats) should feel at least some disappointment about this deal and its likely consequences.

How will the rest of the still-ongoing "fiscal cliff" drama play out?  Stay tuned ...

—Jeff Weintraub