Thursday, December 13, 2012
The phrase "hurtling towards the fiscal cliff" implies a rapidly approaching fiduciary cataclysm. It conjures images of Daddy Warbucks and Rich Uncle Skeleton driving the Monopoly car into the Grand Canyon hand in hand a la Thelma and Louise. Some of you may think this imagery is a little over-the-top; if you do, you clearly haven't been reading the Washington Post, which has been treating every mention of even the possibility of not reaching a deal as a Southern belle would treat a case of the vapours. There are a number of Very Serious People (mostly K Street lobbyists and Beltway pundits) who breathlessly warn of economic Armageddon should America plunge off the terrifying precipice of Current Tax Rates and into the abyss that is Austerity. Countless stories have been devoted to this seeming greatest of economic perils; in fact, the looming disaster has inspired more stories than nearly every other subject combined. Surely this is the greatest of financial challenges the United States has ever faced, and surely all of this is in no way, shape, or form meaningless hype, right?
Sorry. Wrong on both counts.
To explain why, it's necessary to take a little detour to explain what composes the "fiscal cliff" and how each of its elements contributes to legitimate economic danger...eventually. In 2001 and 2003, Congress, at the behest of the Bush Administration, passed a pair of tax cuts that slashed rates across the board while (surprise) drastically cutting the effective rate paid by the wealthiest Americans. These cuts were set to expire in 2010 to avoid the Byrd rule, which would have prevented their initial passage by reconciliation. However, as part of the first of what were to be a series of hostage negotiations over the last three years, the cuts were extended in exchange for funding further unemployment benefits (which had never been politicized during economic downturn before), with the caveat being that the cuts would then expire for good at the end of 2012. As some of you may have noticed, it's now the end of 2012. I should point out that the increase in taxes isn't some mammoth new cashgrab; it's a simple return to the rates at the end of the Clinton presidency. This WILL hit everyone for a good-sized chunk of their income (the White House estimates the average family of four will take a hit of about $2200), but notably it hits the wealthy substantially harder (the aforementioned links note increases in the top rate, plus increased rates on capital gains and dividends). Since this would restore some, albeit not much, needed progressivity to the income tax system, it's not an inherently bad thing for the whole set of cuts to expire. However, the President noted several times during the campaign - and it's concrete fact - that the middle class has been getting wrecked for the last decade plus (I'd say 35 years, give or take) and can't afford that kind of tax hike. Thus, he proposed, and the Senate passed, a bill that maintains the lower rates for the lower tax brackets and permanently eliminates the "marriage penalty" provision while allowing all the other cuts that primarily affect those who make more than $250,000 to expire. That would maintain the lower rates for 98% of families, and 97% of small businesses, provided you don't define small business like Mitt Romney does. Naturally, the bill hasn't come up for a vote in the House, because it would pass. No, really.
The other side of the "cliff" comes from automatic spending cuts signed into law last year. Some of you may recall the hideous "debt ceiling" debacle from the summer of 2011, where Republican bomb-throwers and Tea Party (ugh) sociopaths in the House refused to raise the debt ceiling (an artificial cap on the amount the country can borrow at one time) without enormous cuts across the board to domestic programs. The negotiations were long and mostly pointless. Ultimately, the Budget Control Act was passed in the summer of 2011. It produced the needed raise in the debt ceiling but came at the cost of a $1.2 trillion sequester (forced budget cuts) over ten years, with the sequester split evenly between defense and non-defense programs. This wasn't enough to prevent a downgrade of the nation's credit rating, though Standard and Poor's greatest downgrade was to its own credibility. To try and head off the sequester, a supercommittee was created with extraordinary powers to bring legislation to the floors of each house of Congress without any of the delays or blockades typical to such procedures. To the surprise of absolutely no one, it failed to produce anything. As such, the major aspects of the sequester - namely substantial cuts to defense spending and across-the-board discretionary spending - are set to take effect at the start of 2013, at the same time the aforementioned tax cuts are scheduled to expire.
"But wait! If those both happen at the same time, then no one's spending on anything and the economy will stall out! That actually is bad! You lied to me OH MY GOD THE PTA HAS DISBANDED AAAAAHHHHHHH" Settle down. While it is true that the effects of both will be deleterious to the nation's economic health (which is why I've replaced the term "fiscal cliff" with "austerity bomb"), consider that most people don't pay all their taxes at one time. If we split that average $2200 annual hike over 26 biweekly pay periods, that comes out to $84.62 per paycheck. If it takes two months to get the Republicans to sign on, that's $335 in extra withholding; should the bill make cuts retroactive to January 1st, that money will all come back to the taxpayer in their refund. Likewise, most people don't buy all their groceries for the year on January 1st. Consider just the defense cuts (rumored to be approximately $600 billion over 10 years). If it takes two months to get a deal, that comes out to $10 billion cut in those two months. By comparison, the military budget for last year was roughly $1.4 trillion. Simple math points out that the total cut would equal 0.7% of the total military budget. That's roughly the cost of funding TWO WEEKS of the war in Iraq. It's also roughly the lowest credible estimate for total government oil subsidies. So as you can see, if the austerity bomb does go off, the country WILL go back into recession...but not unless NONE of the sequester's cuts OR the automatic tax hikes are eliminated for several (read: at least three) months. (Editor's note: I'd like to point out that that last link, which matches my feelings on the subject AND backs up my statements, comes from a Nobel Prize-winning economist. So before anyone goes accusing me of not knowing my econ, I found someone who clearly does to back me up.) The simplest solution to the whole thing? Pass the previously-discussed middle class tax stalls (they're not really cuts) and find places where there's obvious waste and unnecessary spending throughout the system (my suggestions: scrapping the F-35 program and allowing Medicare to haggle for prescription drug prices). However, those aren't going to happen because 1, Republicans are pledged to Grover (not that Grover) not to allow taxes to go up on anyone ever, and 2, Republicans are beholded to defense contractors to help them rake in as much money as they can as quickly as they can. Hence the current negotiations between the White House and John "I swear it's not pronounced Boner" Boehner, in which the President has finally stood firm for something and the Speaker has cried about it. Repeatedly. President Obama understands that if he doesn't make a deal before the end of the year, the top tax rates will go up (positive) and he can propose the lower rates on the poor and middle class as the Obama tax cuts and dare the Republicans to vote against lowering taxes. On top of that, he also realizes that when people arre confronted with programs that could be cut, there are some that they really don't want to see cut. He also understands that, coming off an election where he (despite reporting to the contrary) whomped his opponent, he's got the backing of a sizable portion of the country.
So, if going off the cliff (or more accurately, down the bunny slope) won't turn the USA into Greece overnight AND won't have the devastating economic consequences of the UK's austerity plan unless nothing's done for a quarter-plus of the year, why is every major media outlet so terrified of it? Why is every Sunday morning pundit roundtable treating January 1st, 2013 like the mainstream public is treating December 21st, 2012? Why are so-called responsible journalists turning into raving derelicts wearing "The End Is Nigh" sandwich boards and yelling "Bring out your dead!" to the gullible masses? Two words: corporate ownership. See, the austerity bomb actually IS a big deal to the wealthy who own most of the mass media these days. Those higher tax rates cut into their take home pay, particularly the capital gains hikes (no more dodging the top bracket by taking their pay in stock options). The sequester will also take a major chunk out of corporate profits, particularly in the defense sector. The fear of job losses is consequential only because corporate America responds to every potential blow to profit margins by laying off workers. And we haven't even begun to discuss Wall Street, where anything that might bring down dividends is akin to Srebrenica. That's why there are so many demands for a deal, preferably one that damages Social Security or Medicare in the process. That's why the media is pushing the "the cliff is TOTAL DISASTER" meme harder than WCW pushed Goldberg. That's why the average American is now willing to agree with any deficit-reduction commission's plan, even ones that don't exist.
In the words of Paul Harvey, now you know the rest of the story. Carry it with you wherever pockets of ignorance exist, and there are plenty. People only fear what they don't understand, and while understanding is getting better, it's not nearly good enough. The sheer number of people who still believe in death panels is proof of that.
Until next time, remember that knowing is half the battle.