The Fiscal Cliff: You Must be this Intransigent to Board this Ride, Let’s Go!

DivingIf you’re like me, you love roller coasters, most notably the incarnations that retain the preliminary long steep climb accompanied by the ominous clickity clack of the chain and track below the car until the pinnacle is reached. At the apex, all is silent, and just as you can see nothing but sky before you and the tiny heads of fellow park visitors hundreds of feet below you, the car proceeds downward at a ridiculous speed sucking the breath from your lungs. It’s exhilarating fun, and generally lasts no more than a minute or two. At this very moment, the United States is scaling hill number one while frantically ensuring that the lap bar has engaged properly. On December 31, 2012, a series of economic events are scheduled to take place that many are referring to as the “fiscal cliff.”

The Bush tax cuts enacted in 2001 and 2003, and extended through 2012 by President Obama in a December 2010 agreement, are set to expire. The expiration would adjust marginal tax rates upward across all income brackets and modestly raise the tax on capital gains–income earned from investments–from 15% to 20%. The expiration will also remove qualified dividends from special tax treatment, and undo a temporary patch to the Alternative Minimum Tax, among other smaller changes. Additionally, as part of the deal to raise the debt ceiling in 2011, Democrats and Republicans agreed to automatic across the board spending cuts of $1.2 trillion over the next ten years. The cuts are part of a sequester agreed to by both parties which will go into effect because the two sides could not agree on an alternative as required by the original pact. While certain mandatory outlays are exempted from the spending reductions, the total amount will be split roughly 50/50 between discretionary and defense spending unless consensus is reached before or sometime shortly after January 1, 2013. The federal unemployment extension and temporary 2% payroll tax reduction would also expire at years end. If Republicans are not willing to move into a position of rationality and responsibility, my position is that we should all buckle up and see where the ride takes us, rather than concede to incoherent demands in order to to avert a greater short term disaster.

Economists and the Congressional Budget Office have been busily crunching the numbers in an attempt to estimate the so-called fiscal cliff’s impact on GDP, employment, and government services. The CBO estimates that the economy will contract in the first half of 2013 and grow modestly in the second half, for an overall growth rate of only 0.5%. Other estimates vary widely from an economic impact equal to 2% of GDP to 7.5% of GDP over the first year after the spending cuts and tax adjustments take effect. The $1.2 trillion in cuts will be reduced to roughly 18% due to reductions in interest payments and smaller interest payments on the national debt as a result of borrowing caps and borrowing reductions as a result of the sequester accord. Estimates of the potential impact on jobs are gloomy as well, with unemployment predicted to top 9% in 2012 and 2013.

While Social Security, Medicaid, food stamps, the CHIP children’s’ health program, child nutrition, Supplemental Security Income, the Earned Income Tax Credit, veterans’ benefits and federal retirement are exempt from the sequester spending cuts, all other federal programs, including Medicare, will face smaller outlays. Defense spending will be cut by roughly $484 billion over nine years, or $50 billion each year. By way of example, the yearly cuts equal the cost of only seven months fighting in Afghanistan. Defense Secretary Leon Panetta has nonetheless walked the party line, referring to the cuts as “devastating.” He was out in full damage control mode as early as November, 2011.

The CBS Evening News reported, “A lot of folks in the defense industry could lose their jobs. The failure of the budget negotiation means that in a little over a year, across-the-board cuts in federal spending will be automatic and half of them will come from the Defense Department. … To hear Defense Secretary Panetta tell it, automatic spending cuts would be devastating to national defense.” Panetta: “It’s a ship without sailors. It’s a brigade without bullets. It’s an air wing without enough trained pilots. It’s a paper tiger.” CBS added, “Across-the-board cuts would, according to the Pentagon, mean the loss of a million or more jobs in the defense industry, increasing unemployment by 1%.”

Panetta is obviously attempting to frighten the public as well as lawmakers into pushing for an agreement that will avoid the scheduled Pentagon cuts from taking effect in 2013. In his defense, the military budget was already slotted to absorb $500 billion in cuts over the next decade prior to the sequester as a result of past budget negotiations. However, the United States still spends as much money annually on its defense budget as does nearly the remainder of the world. It is inconceivable that an American soldier will find himself or herself on the battlefield short of ammunition due to $50 billion in yearly cuts, or that reducing the largest military the globe has ever seen by 10% will render it impotent. If the only means through which the people can force the Pentagon into spending its allocated funding responsibly and making determinations as to where to deploy its resources carefully is to allow the sequester to take effect, it may be the best course of action. For decades neither Democrats or Republicans have been willing to seriously study and critique military programs and overall spending. As a consequence, I am left will little faith that Panetta’s words are sincere, or that the military in unable to defend the United States provided a small 10% cut in overall funding. If the military is unable to fund its operations, it can easily pull its equipment, troops, and contractors from Afghanistan and Iraq to make up the difference. The fact of the matter is that the military and its contractors have operated in a horribly inefficient manner for decades without oversight. The Pentagon is not above constructive analysis of its spending effectiveness simply because it is charged with the duty defense rather than education.

We already have evidence that the Republicans will continue to negotiate in bad faith. John Boehner, Paul Ryan, and fellow Republicans just recently passed a measure aimed at avoiding the defense cuts mandated by the sequester. Their solution: to slash federal workers’ retirement plans and cut even more from social programs such as food stamps and Medicaid. All Democrats and 16 Republicans voted no. This isn’t a serious attempt at governing or legislating, and it sure as hell isn’t a responsible attempt to spread cuts fairly across government. It is more of the same slash and burn non-conciliatory garbage that has become the trademark of the modern Republican Party. As the onset of the cuts draws nearer, what evidence do we have that a more scrupulous proposal will emerge from the GOP? Rather than prepare for the inevitable one-sided compromise, the Democrats should be readying a public relations campaign to explain to the American people why it is that a deal could not be reached. Let us not forget that the reason we sit on the edge of the ominous fiscal cliff to begin with is the Republicans’ refusal to authorize an increase in the debt ceiling, a routine order of business that has in the past normally been completed with legislation one page in length.

To be sure, the economic effect of the domestic spending cuts and tax adjustments will be dramatic. The combined effect will likely increase unemployment and prune the meager recovery already underway. However, the alternative is less appealing. Republicans have not and likely will not negotiate in good faith. If Obama is able to win reelection in November, Republicans will again make a calculated strategic decision as to whether to embark upon genuine negotiations for fear of shouldering blame in 2014 for a renewed recession, or to proceed full speed ahead on their course of economic lunacy, refusing to increase tax rates on the wealthy, dividends, and capital gains. I suspect the GOP will proceed due north toward the latter. In an effort to solidify its majority in the House of Representatives, state legislatures and governors mansions, it has pigeon holed itself into a position of intransigence by making unrealistic promises to the likes of Grover Norquist, corporate PAC contributors, and Tea Party lunatics. It has left itself with little choice but to abrogate its promises in order to return some civility to government and economic policy or to travel further down the path of destruction.

With little hope that Republicans will agree to offset decades of stagnant middle-class wage growth and tepid domestic investment by adjusting tax rates upward for the wealthy, responsible Democrats will be left with no alternative but to allow the totality of the Bush tax cuts to expire and to refuse to curtail the automatic spending cuts. With Obama in the White House for four more years, Democrats would be wise to bank on a recovery following the initial shock of the fiscal cliff. Tax revenues will almost certainly initially decrease significantly as the CBO has predicted. However, the CBO also predicted that if Democrats and Republicans were to agree to extend the Bush tax cuts and curtail the automatic spending cuts for the long term, the economy would ultimately be worse off. The CBO actually recommends increasing the deficit now through tax reductions and spending increases in order to spur economic growth while at the same time putting in place a solid scheme for deficit reduction and tax increases in the future, a plan that has absolutely no chance of passing through a Republican controlled House.

So, given the political posture of the Republicans at this time, the only conscionable position for the Democrats to take is one of absolute steadfast refusal to continue down the road of capitulation and compromise. It simply must not agree to further cuts in government spending, most notably cuts to the inherently stimulative social programs of unemployment insurance and food stamps, to offset defense cuts. It must uphold its promise to seniors to provide effective affordable medical care through the Medicare program. It must hold firm to a position of economic efficacy in refusing to allow the false propaganda of cutting taxes on the wealthy to create jobs to become entrenched in its platform. It must not be cornered into extending reduced high income marginal tax rate cuts in exchange for extending middle-class tax cuts.

It will be a formidable task given the Democrats’ inherent bent toward compromise, and almost certain political consequences for proceeding down this righteous path. It is however the only reasonable course on which to proceed given its opposition. It is unfortunate that the Republican Party has married itself to so many sociopaths hell bent on destroying the lives of millions of Americans in order to serve their own myopic and utterly unsound religious and economic positions. However, if the ship is doomed to taking on water, it is no longer acceptable for the wealthy to sit on deck while the rest of us man the pumps. Jump!