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4 Painful Political Lessons from the Fiscal Cliff Debates

We’ve avoided, for the moment, a self-made trap. Now, of course, we’re on to the next one.

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Well, I’m glad that’s over.

Now that the House has passed the Senate compromise bill, the full spate of tax increases and spending cuts that went into effect yesterday will be  shut off (though the sequester was just suspended for a couple of months).  Still, I don’t mean to be a downer, but any relief you feel should be analogized to how much better you feel when you stop banging a hammer on your head.  We’ve avoided, for the moment, a self-made trap.  Now, of course, we’re on to the next one—the debt ceiling, which really is a cliff in that to go over it (can you “go over” a ceiling?) is to default.

The resolution of the fiscal cliff was much as I and others predicted—a very short trip over the cliff—more of a bungee jump, really.  As we said, once House R’s could label a vote for the compromise a net tax  cut, enough of them could vote for it.  In fact, one of their leaders, Dave Camp (R-MI) sold the measure to his caucus as the “largest tax cut in American history.”

So, did we learn anything from the episode in reckless governing?  Here’s my list, but these are more things we already knew than things we learned:

1) It’s become a cliché to observe the  dysfunctionality of our political system.  The problem—which has existential implications—is that the system cannot diagnose, prescribe, and thus it cannot self-correct.  To the contrary, it is becoming increasingly efficient at inflicting wounds.   The most important question in politics right now is: how did Congress become the biggest threat to the economy and what can be done about it?  I actually have a pragmatic, actionable answer to that….read on.

2) Republicans don’t care about deficit reduction.  They care about protecting the wealthy (I told you this is stuff we knew) which worsens the deficit.  Their talking points suggest they want to cut spending, reduce entitlement s and shrink government, but for the most part—there are notable exceptions*—they don’t have actual proposals to do so.

They worked hard in this debate, and with some success, to shield the wealthy from higher tax liabilities, while never uttering a peep about the expiration of the payroll tax cut, which only bumped up paychecks below $110,000, and thus meant nothing to their funders.  But they managed to raise the threshold on the income tax rate increase to $450,000 (from $250,000) and to ensure that the estate tax would only hit the top 0.2% of estates, instead of the top 0.3% (!) that the D’s were seeking.

This is a predictable outcome of a political system with no effective firewalls between big money and politics.  And while I and others have understandably raised eyebrows about the relatively light revenue number in the bill ($600 billion in new tax revenue over 10 years), when you think about it that light, you’ve got to the give the President (and VP!) a lot of credit for pushing as hard as they did.  It’s true the public was very much with them, but the sad truth is that all American politicians must pay attention to big money.

*One exception is the desire by some to move to Ryan-style premium support for Medicare, which may be specific but is a) politically implausible and b) a cost-shifter, not saver.

3) The fiscal debate has killed the economic debate.  Economists traditionally worry about “crowding-out”—when government borrowing sucks up too much private capital, leads to higher interest rates, and crowds out more productive private borrowing.  That hasn’t happened.  Instead, there’s been a different type of crowding out that has been far more damaging to the economy.

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