The politics of Washington DC: what's the Fiscal Cliff?

[Bill Peckham]

In short current law requires that on January 1, 2013 income tax rates go up across the board, and certain spending cuts occur across the budget. This was legislated to happen in two steps. First when the so called Bush tax cuts included a sunset provision that they would expire in 10 years and then second when the Republican house required both extending the Bush tax cuts and required automatic spending cuts in January 2013 as the price for agreeing to raise the US's debt limit.

From the Congressional Budget Office (PDF):



Among the policy changes that are due to occur in January under current law, the following will have the largest impact on the budget and the economy:

• A host of significant provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Public Law 111-312) are set to expire, including provisions that extended reductions in tax rates and expansions of tax credits and deductions originally enacted in 2001, 2003, or 2009. (Provisions designed to limit the reach of the alternative minimum tax, or AMT, expired on December 31, 2011.)
• Sharp reductions in Medicare’s payment rates for physicians’ services are scheduled to take effect.
• Automatic enforcement procedures established by the Budget Control Act of 2011 (P.L. 112-25) to restrain discretionary and mandatory spending are set to go into effect.
• Extensions of emergency unemployment benefits and a reduction of 2 percentage points in the payroll tax for Social Security are scheduled to expire.

With those and other policy changes contained in current law, the deficit will shrink to an estimated $641 billion in fiscal year 2013 (or 4.0 percent of GDP), almost $500 billion less than the shortfall in 2012. Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013 ...


The Country is again at the point where we will soon need to raise our debt limit and avoid the severe consequences of what amounts to an austerity program. My view is that the President is in a strong position to press for the budget he wants and will continue to press for it into the new term. The Republicans have a tactical move available: pass the Senate's Bill extending the tax cuts for everyone but without additional tax cuts for those earning over $250,000, this option will be available until the new Congress starts in January. It would leave the next Congress, still to deal with, the spending cuts and the debt limit

The question it seems to me is what will the House Republicans do? Fold now (a tactical retreat), or fold latter or hold out for months seeking a better option?

I think they will hold out and end up taking a deal that is worse than the one they could get now. Basically I think the longer they hold out the worse the deal the Republican House will end up agreeing to.

[MooseMom]

I think everyone agrees that we need more revenue and less spending.  As always, the question is how to achieve those goals in the most equitable way.

I don't understand why the Republicans refuse to entertain the notion of letting the Bush tax cuts expire for those making over $250,000.  I know that that single move won't balance the budget, but it will help AND it will be a symbolic gesture of the fair play that all Americans value.  This is what the President campaigned on, and this is what the majority of Americans voted for.  The richest people will still get their tax break on the first $250K.  I know that the President has suggested a 39.6% tax rate for the wealthiest Americans.  Perhaps he could compromise and bring that rate down to, say, 38% as a show of good faith.

When we speak of entitlement reforms, maybe we could go after the true Medicare fraudsters, ie Davita, and claw back some money from the likes of Kent Thiry.  Corporate banditry is rife. 

Frankly, I'm fed up with this constant testosterone fueled battle fought in terms of winning, losing, leverage, etc.  Doing what is right for our financial health shouldn't be seen in terms of "tactics". 

Spending cuts and debt limits and fixing the economy isn't going to be done in the next three weeks, but we do need to see something agreed to before the end of the year so that the American people can be reassured that Congress is interested in our country and not merely in maintaining their seats come the mid-term elections.

[Bill Peckham]

I think everyone agrees that we need more revenue and less spending.  As always, the question is how to achieve those goals in the most equitable way.

I don't understand why the Republicans refuse to entertain the notion of letting the Bush tax cuts expire for those making over $250,000.  I know that that single move won't balance the budget, but it will help AND it will be a symbolic gesture of the fair play that all Americans value.  This is what the President campaigned on, and this is what the majority of Americans voted for.  The richest people will still get their tax break on the first $250K.  I know that the President has suggested a 39.6% tax rate for the wealthiest Americans.  Perhaps he could compromise and bring that rate down to, say, 38% as a show of good faith.

When we speak of entitlement reforms, maybe we could go after the true Medicare fraudsters, ie Davita, and claw back some money from the likes of Kent Thiry.  Corporate banditry is rife. 

Frankly, I'm fed up with this constant testosterone fueled battle fought in terms of winning, losing, leverage, etc.  Doing what is right for our financial health shouldn't be seen in terms of "tactics". 

Spending cuts and debt limits and fixing the economy isn't going to be done in the next three weeks, but we do need to see something agreed to before the end of the year so that the American people can be reassured that Congress is interested in our country and not merely in maintaining their seats come the mid-term elections.

Compared to defaulting on US Treasuries, allowing the spending cuts and tax increases to happen would be a minor event, so I am not concerned with the January 1 milestone. I think Bruce Bartlett is right when he argues that the real fight is over the debt limit (NY Times Link):

"In short, the debt limit is a hostage that Republicans are willing to kill or maim in pursuit of their agenda. They have made this clear ever since the debt ceiling debate in 2011, in which the Treasury came very close to defaulting on the debt."

Wishing for everyone to get along is fine but both sides would need to agree to a deal and there is no evidence that Bohner can deliver votes for anything the President could support. What evidence is there that Bohner can negotiate a deal? If he can't deliver his caucus then the only option is to wait until he or someone else steps forward who can negotiates a deal that can pass the Senate and get 218 votes in the House.

One thing that must not happen is that the President and the Democrats in Congress must not allow a repeat of the 2011 debt limit fight and risk needlessly damaging the US and the world economy. I think that means you have to wait for 20 republicans to break ranks and join Democratic House members voting to raise the debt limit, cut taxes on the first $250,000 of income and make different cuts to the federal budget. If the 20 Republicans are strategic they'll get some republican budget choices included but it'll be hard. That'll take time and pressure. So I say buckle up and pass the pop corn.

[Rerun]

Why is the President farting around trying to get American support. He won!  Campaign over!  He needs to sit his butt down with congress and stay there until something is done.  He needs to be a leader.

[Bill Peckham]

Why is the President farting around trying to get American support. He won!  Campaign over!  He needs to sit his butt down with congress and stay there until something is done.  He needs to be a leader.

The President is ready to sign the Senate Bill, the House has to act ... he can't sign it until it passes the House. He ran on extending the cuts for everyone but not giving additional cuts for those above $250,000, the Senate Bill does exactly that, he won the election as you say, so .... Why won't the House act?


It would even be in the House republican's political interest to act yet they seem unable to - why do you suppose that is?

[MooseMom]

Why is the President farting around trying to get American support. He won!  Campaign over!  He needs to sit his butt down with congress and stay there until something is done.  He needs to be a leader.

What does this even mean, "He needs to be a leader"?  He's not out "farting around trying to get American support."  He's urging ordinary Americans, the very ones who voted for him by more than 5 million votes, to pressure Congress into getting their act together and come to a solution.  I've already emailed my congressman and urged him to work with the President and for the rest of us.

The one who has a leadership problem is Speaker Boehner.  He's having real problems delivering his caucus, so there is obviously a sizeable chunk of House Republicans who do not see him as their leader at all. 

[Hober Mallow]

Americans are chonically uneducated about how our tax structure works. I read a recent article in which a businessowner said she was purposely doing things to make less money so that she would earn less than $250,000 a year and thus not have all her income taxed at a higher rate. That's complete insanity, based on what for a businessowner should be an unforgiveable misunderstanding about taxes. No matter how much more money she makes than $250,000, that $250,000 isn't going to be taxed at a higher rate. Just about anyone in my family I've talked to about taxes, regardless of their political views, seems to share this misunderstanding.

[Bill Peckham]

Americans are chonically uneducated about how our tax structure works. I read a recent article in which a businessowner said she was purposely doing things to make less money so that she would earn less than $250,000 a year and thus not have all her income taxed at a higher rate. That's complete insanity, based on what for a businessowner should be an unforgiveable misunderstanding about taxes. No matter how much more money she makes than $250,000, that $250,000 isn't going to be taxed at a higher rate. Just about anyone in my family I've talked to about taxes, regardless of their political views, seems to share this misunderstanding.

I'm not sure all of our Congressional Representatives understand this either.

[Bill Peckham]

Well so much for "Make a deal now/vote present; fight against debt limit increase" congress is done for this session. I think I made it so you can change your vote. Now what?

The Republican House is in total disarray, it would benefit the country if there was a republican schism that saw 40 or 50 republicans join the democrats and actually govern - to pass tax reform, comprehensive immigration, climate change and now gun control. Stranger things have happened.  A group of republican pragmatist  could advance some good policies while addressing the underlying issues. I'd say that would be the best long term outcome so I'll hoipe for that.

I think there is a vacuum on the right for someone to anchor themselves politically to the left of the Tea Party, but next year the new congress will have fewer republicans which will mean that even a group of twenty reps, with what could be pretty eccentric views, could undercut the Republican's ability to negotiate. Then what happens? Will Bohner even be Speaker for the next session?

[MooseMom]

I have absolutely no idea what is going to happen, but I have to say that it had not occurred to me until today that Speaker Boehner's moves might be governed by his own job in/security.  He really is in a tight spot.  Remember when he cried when he was handed the Speaker's gavel?  I have a feeling he might be shedding some tears right about now.

[Bill Peckham]

I have absolutely no idea what is going to happen, but I have to say that it had not occurred to me until today that Speaker Boehner's moves might be governed by his own job in/security.  He really is in a tight spot.  Remember when he cried when he was handed the Speaker's gavel?  I have a feeling he might be shedding some tears right about now.

I think if they can't put something together before the next Congress then it could be months before the House acts on any legislation. One thing in Boehner's favor is that I'm not sure any Republican but him really wants the job.

Maybe it is possible that the Republican's leaving this Congress and all the Democrats could vote through the Senate Bill extending the Bush tax cuts on the first $250,000 in income leaving the debit ceiling and the spending cuts in effect for the next Congress. But when you look who is leaving, it includes the retirees that might go in for some bipartisanship but it also includes Allen and Walsh who are unlikely to go along with it, so you would have to have Boehner and some of the other Republican leaders but that would mean they would face stiff opposition once the next Congress starts in just two weeks.

It is also possible that the Senate could come up with a bill that uses the sequestration as a baseline spending level and reorganizes the cuts reversing things like the doc fix and the alternative minimum tax, and allowing the pentagon more flexibility to find the savings and maybe have offsets in the entitlement spending but ... the politics look nearly impossible unless 40 of next year's republican house members are ready to break with their caucus.

I think the most likely outcome is no action which will start to effect Medicare in about two weeks, severely in 6 weeks because of the automatic cut to physician reimbursement. Without a larger deal it is hard to see how they could do their normal kick the can down the road for a year approach to the doc fix.
 
In addition to the twelve days of Christmas we're going to see twelve days of Republican chaos followed I am afraid by months of Republican civil war. Not good news for the economy or anyone who relies on the economy doing well (about 99% of us).

[cariad]

I have been trying my best to keep up with the events unfolding in America despite being over here with no television. I have been using the computer to watch the Daily Show (I would not have missed Mitch McConnell filibustering his own proposal for the world!) but beyond that, I rely on The Daily Beast, Slate, and other random (legitimate) sources that come up when I google 'fiscal cliff'.

Here is what I have gathered:

Daily Beast and other sources have said Boehner's career is over. I wouldn't be enough of an insider to know if this is his Little Bighorn, so I defer to their journalistic expertise.

House and Senate both become more liberal in the new year, as Bill pointed out. I personally would love to see Elizabeth Warren involved in this.

I've seen the economic catastrophe that waits for us on the other side of the fiscal cliff already labelled "the next Republican recession".

An article I read late last night (cannot remember the source) said that Boehner had tried to pass the job off to Eric Cantor who then stabbed Boehner in the back by returning the job to him with things in a worse state than before Cantor got hold of it. 

Grover Norquist seems to still be a factor. Why the GOP don't do themselves a favour and tell him to get lost, I don't know. He is not an elected official and should not be dictating policy. How has he got away with this for so long? I know they signed a pledge, but politicians break promises ALL THE TIME, what is so special about this one? Signing anything that contains words like 'never' is stupid and it is time to own up to that mistake and move on. It seems that they would rather go over the cliff, let the automatic tax hikes go into effect, just so they can then talk about LOWERING TAXES and take no personal responsibility for increasing them. Yes, the party that shrieked personal responsibility at us for the past four years cannot bear the thought of demonstrating this characteristic themselves and accepting the consequences.

The latest I read (from CNN) said that Obama has stated that if Harry Reid and Mitch McConnell cannot work out a deal by Sunday, Congress will vote on Obama's proposal.

I fear that the impact of a cliff dive will hardly stop at US borders and that this will be the shock felt round the world. I don't know if I can take the stress of another 2008. We still own assets in America, too, so this is going to hurt if they don't stop the slide in time. I REALLY fear for those of you who must rely on Medicare for treatments. This is insanity.

(That was a rather random collection of thoughts as I try to make sense of the situation from afar...)

[Bill Peckham]

I don't think Boehner is going anywhere mostly because no else seems to want to be Speaker. But going into the next Congress he is in an incredibly weak position. I think at some point he will need to suspend the Hastert rule that says you only bring a Bill to the House floor for a vote if a majority of Republicans support it. The Hastert rule is what is preventing Boehner bringing the Senate legislation that was passed in July to a vote, it would pass the House but with only 80 or so Republican votes. I don't think Boehner would risk suspending the Hastert rule until he is reelected as Speaker, so I think we'll go into the next session of Congress with the law as it is currently written and then something will come out of the Senate that will have to sit waiting for the House to take action. So it becomes a question how long can the Speaker hold back legislation that does not have support from >50% of his caucus? I think that will depend on how the tax hikes and spending cuts manifest  and what he plans to do about raising the debt ceiling. I think it will drag out for months.

The next Congress is going to be even more unwieldy for Boehner because of the gerrymandering the Republicans brought to bear after the 2010 census in time for the 2012 election. The gerrymandering was all perfectly legal, and it did work in that the Republicans lost the popular vote, more people voted for Democratic candidates for Congress than Republican candidates, but because of their gerrymandering they successfully retained their majority, but now there are about 150 Republican representatives that have no concern about a Democratic electoral challenge, their only concern is a Republican Primary challenge. The electoral check that is suppose to moderate the House has been corrupted and made the Republicans in the House unresponsive to anything but pressure from the right.

[Bill Peckham]

Last night the Senate passed legislation that would address the fiscal cliff either directly or by putting of a decision for months or a year. The fix that is required every year to keep Medicare reimbursement for doctors about the same is part of the deal, the Senate's legislation would keep physician payments as they are for another year.

I have to say I have my doubts that the House is going to act on this. What I'm reading says that there must have been private assurances from the House GOP that they'd support the Bill (otherwise they'll be leaving the Republican Senators exposed for no reason - this vote could fuel a primary challenge against McConnell for instance) but if it is true, that there were private assurances, then I think it must mean that Boehner promised to bring the Bill forward without majority support from his caucus. But if he puts aside the Hastert  rule and passes the legislation with Democratic votes isn't he risking his Speakership? Or even a primary challenge in? The Republican base is going to be very pissed at either McConnell or Boehner or both. I think McConnell will be left standing when the music stops Wednesday night.

I'll be surprised if the House passes the Senate bill but we'll know soon enough.

[Hober Mallow]

I hate the term "debt limit." "Debt ceiling" is a little better. Debt limit makes it sound like a credit limit, and Americans are confused into thinking that the raising of the debt ceiling means government is giving itself permission to add more debt. That's not what it is. The debt ceiling allows the government to pay for the debt we already have. It's bewildering that anyone ostensibly concerned with our national debt would be against raising the debt ceiling.

[Bill Peckham]

I hate the term "debt limit." "Debt ceiling" is a little better. Debt limit makes it sound like a credit limit, and Americans are confused into thinking that the raising of the debt ceiling means government is giving itself permission to add more debt. That's not what it is. The debt ceiling allows the government to pay for the debt we already have. It's bewildering that anyone ostensibly concerned with our national debt would be against raising the debt ceiling.

Well it is the limit of debt we are allowed to issue in the form of treasuries. It would make sense to require debt authorization be included with the appropriations bills that spend the money. When Congress votes to spend the money they should also say how they plan to finance the spending.