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    A 'massive fiscal cliff' coming next December

    Congressional and presidential campaigns, for obvious political reasons, would rather not talk about such ominous things until after the election. Meanwhile, it's simple slogans time.

    U.S. Rep. Paul Ryan

    U.S. Rep. Paul Ryan U.S. House of Representatives

    "To govern is to choose.  To be unable to choose is to be unable to govern."
              — Sir Nigel Lawson, British statesman

    Democratic and Republican legislators in Olympia continue to grapple toward a budget agreement that can  get the state budget, at least theoretically, toward balance.  In Washington, D.C., Democrats and Republicans are engaged in a similar exercise but without any real compulsion to act until January, 2013, when a new presidential term begins and a new Congress takes office.

    The budgets now on the table at national level are blunt-edged political documents that have absolutely no chance of congressional passage or presidential signature.  They are political markers from which the parties' presidential and congressional candidates can proceed.

    Since Democrats' big congressional losses in 2010, President Barack Obama has abandoned any credible attempt at near-term deficit or long-term debt reduction.  His most recent budget submission reflects this and mainly provides reinforcement for 2012 campaign themes that will stress "protection" of Social Security and Medicare and higher taxes for the rich.  According to the independent Tax Policy Center, sponsored by the Brookings Institution and Urban Institute (both moderate/liberal institutions), Obama's February budget would raise top one-percent earners' taxes about $90,000 annually.  Overall, his proposal would raise taxes about $1.4 trillion over the next five years for higher earners — defined as couples making more than $250,000 annually.  Obama would allow Bush tax cuts for high earners to lapse; would raise the top marginal rate from 35 to 39.6 percent; and would put new limits on deductions for various purposes.

    Rep. Paul Ryan's Republican budget, a point of departure for GOP candidates, emphasizes reductions in federal spending.  In contrast to the Obama budget, it would reduce the current six tax brackets to two brackets at 10 and 25 percent.  It would reduce the current 35 percent corporate tax rate to 25 percent.  It would change Medicare by giving citizens below 55 the option of entering the present program or, alternatively, to choose their own plan and receive a premium-support payment.  The GOP budget would make far more severe cuts in long-term debt than the Obama plan — making it either more responsible or heartless, depending on your viewpoint.

    Historic differences between the two major parties are reflected in the two budgets.  The U.S. Senate, normally a player in the budget game, has not passed a budget in three years (its Democratic majority rejected even the last Obama budget overwhelmingly). It cannot be expected to take any budget action this year — leaving the Obama and Republican House budgets as the working documents.

    The big showdown will come next December-January when, in the words of Fed Chair Ben Bernanke, the Congress will face "a massive fiscal cliff."  Then both Bush tax rates and a payroll tax cut will expire while, simultaneously, $1,2 trillion in automatic spending cuts will kick in (after the bipartisan congressional "super committee," co-chaired by Sen. Patty Murray, failed to make rational deficit reductions).  Unemployment-benefit extensions also will expire.  All on January 1.

    Various analysts estimate that the simultaneous end of the Bush tax cuts, and the imposition of big spending cuts, could cut as much as 2 to 3.5  percent off 2013 economic growth, bringing back double-digit unemployment and a big dip in financial markets.  This would constitute the serious second dip in what we earlier feared would be "a double-dip recession."

    Hey, you might ask, why not deal with this now rather than coming to the brink next New Year's Eve?  

    No.  Both parties are betting that their leverage will be better next New Year's, after the November election, than it is today.  Besides, if you are a 2012 candidate for reelection, why not run on bumper-sticker slogans about higher taxes or lower spending rather than facing voters after taking tough and possibly unpopular decisions?

    Beyond these competing visions, as represented by the two budgets, there are economic wild cards hovering over the 2012 campaigns:  The big gas-pump price increases; the possibility of a Euro-zone sovereign default; a Middle East war which would choke off oil supply, escalate prices, and possibly trigger a global recession; and falling demand in China.  

    This is serious stuff demanding attention by serious people.  Fortunately for the country, both President Obama and Mitt Romney, the prospective Republican presidential nominee, are smarter than their present platforms make them seem.  We could have a worse president in office as we come to the "massive fiscal cliff."  Happy New Year, 2013.

    Ted Van Dyk has been involved in, and written about, national policy and politics since 1961. His memoir of public life, Heroes, Hacks and Fools, was published by University of Washington Press. You can reach him in care of editor@crosscut.com.

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    Posted Sat, Mar 24, 9:35 a.m. Inappropriate

    Thanks for deciphering the fiscal political calculus our country is facing over the next couple of years. I'm gonna hang onto this to read again after the election when the posturing over what to do with the Bush-era tax rates becomes high drama. This is a wonderful playbook to have as we watch the performances.

    Posted Sun, Mar 25, 12:03 p.m. Inappropriate

    How is falling demand in China a 'Wild Card'? Quite ruddy writing otherwise.


    Posted Sun, Mar 25, 6:49 p.m. Inappropriate

    Less demand in China would mean less export opportunities.


    A big question every time I read "the deficit is projected to be $$$ trillion" is "who is going to buy all that debt?" It won't be Japan. Will it be China? They have their banking problems too. T bills and bonds don't seem to be marketed to individuals any more, just institutional investors.


    Posted Sun, Mar 25, 9:14 p.m. Inappropriate

    One thing needs clarification in this article:
    Then both Bush tax rates and a payroll tax cut will expire while, simultaneously, $1,2 trillion in automatic spending cuts will kick in (after the bipartisan congressional "super committee," co-chaired by Sen. Patty Murray failed to make rational deficit reductions). Unemployment-benefit extensions also will expire. All on January 1.

    The wording of this implies that the Bush tax expiration will increase the deficit. In fact, this will be net INCREASE in tax revenues since the tax rates will go up for the upper tax brackets.

    We should also remember that the Congress is supposed to be responsible for the budget, not the Executive branch. With today's Congress, you could probably get more done if you replace them with a bunch of 16 year olds. This should not be thrown onto the President. It should be heaped onto the Congress and the bright lights should stay focused on the Congress. The Executive branch has enough power as it is. The last thing this country needs is to cede budgetary authority to the White House as well.

    Posted Sun, Mar 25, 9:19 p.m. Inappropriate

    As far as Medicare goes, forget Obamacare. I want Cheney-care where I can have 4 heart operations and a heart transplant without getting kicked off my health plan. How many health plans in America provide heart transplant coverage for a 71 year old? Apparently the government-run health plan that Dick Cheney has is pretty damn good.


    Posted Mon, Mar 26, 3:51 a.m. Inappropriate

    It is right that "To govern is to choose. To be unable to choose is to be unable to govern.".


    Posted Mon, Mar 26, 5:36 a.m. Inappropriate

    Thanks for your comments. A couple followups.

    1. Falling demand in China affects not only U.S. exports, and our economy, but also has a domino effect on other economies around the world. A more drastic falloff than at present would have significant global effects.

    2. The simultaneous expiration of the Bush tax cuts and the kick-in of
    $1.2 trillion in automatic spending cuts (not to mention the end of payroll tax cuts and unemployment-benefit extensions) would have a strong depressive effect on the still fragile U. S. economy. Think of jamming on the brakes severely when your car was only beginning to approach normal speed.

    Long term, we sorely need debt reduction. That will involve some selective revenue increases and spending cuts. This will have to include elimination of huge "tax expenditures"---that is, loopholes, subsidies, and deductions---which favor some economic activities over others and shrink the federal revenue base and, also, stabilization of
    Medicare and Social Security spending which cannot be sustained
    because of big demographic shifts in the population. Incumbent elected officials fear tackling these tasks, especially in an election year.
    There also must be considered reductions in defense spending (the Obama defense-budget proposal is a good point of departure) and, of course,
    selective cuts in "discretionary spending" (i.e., everything else beyond entitlements and defense). But the automatic $1.2 trillion in cuts scheduled for January, split between defense and discretionary spending, would not be selective but arbitrary and destructive. Bottom line: President and Congress need to act before year's end to avert the scheduled January 1 fiscal train wreck.

    Posted Mon, Mar 26, 9:38 a.m. Inappropriate

    Ted. You seem to automatically make the assumption that the expiration of the tax cuts is going to kill the economy. That's a Republican talking point, not a fact-based policy reality. That's how your statement reads at least.

    The reality is that taxes get spent in the economy as well and if you cut taxes you also have to cut public spending like teachers, firemen and policemen. What about that depressive effect on the economy?

    Historical Tax Rates in the United States

    If you look at this simple chart on the web site above, you'll see tax rates are very low, down from 90% in the 50s and 70% in the 1970s. If taxes depressed the economy, then the 70s would have been a great depression. This is more myth than fact.

    If you'll look at another low tax rate year, you'll see 1929 and 1930 where the tax rate was 24%. You'd think the economy would have been booming but instead we got the Great Depression in 1929.

    I dispute the assumption that the expiration of the Bush tax cuts is going to tank the economy. If anything, these historically low tax rates prove that low taxes don't help they economy. If they helped, we'd be in a boom period right now.

    Posted Mon, Mar 26, 9:41 a.m. Inappropriate

    It's not at all clear that allowing the Bush tax cuts to lapse and having the top rates return to Clinton era levels will kill the recovery. I think TVD has quaffed the Republican kool-aid on that one. Income above $250,000 tends not to be heavily spent on consumer goods, and most large corporations are awash in cash reserves that they could invest in expansion if they chose. So we could see revenue increases without a recessionary dip, especially if the payroll tax holiday is separated out for immediate extension.

    The political analysis is about right. January 2013 will place some long-deferred tough budgetary choices before a Congress that deals poorly with rational decision making of any kind. So that's a pretty scary prospect whatever its dimensions. But TVD's attempt at economic prognostication seems weak and lacking in real insight.


    Posted Mon, Mar 26, 10:24 a.m. Inappropriate

    Think of the global economy as a car going too fast, plowing through crowds, hit & run fleeing the scene of the crime, the power mad driver excused on the grounds of plutocratic immunity. Step by step we're closer to a plutocratic final solution: population control measures.


    Posted Fri, Mar 30, 1:56 p.m. Inappropriate

    If the repeal of the Bush tax cuts and the payroll tax holiday would give the government more revenue that it would spend on programs then perhaps I'd agree with Richard B. and woofer. But in this current climate increased revenue likely won't be spent on infrastructure or any other worthy cause--it will be used to pay down the debt instead. The stimulative effect of that would be minimal.

    As for corporations awash in cash, there's a reason for that. The favorable opportunities for investment aren't easy to find...largely because folks aren't spending as they were pre-2008.


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