Memo to the Media: There Is no Fiscal Cliff -- Stop Calling it That!
A casual news consumer couldn't be blamed for believing that our government is re-enacting the final scene from Thelma and Louise –hurtling at breakneck speed towards the abyss. That there is a “fiscal cliff” ahead – a perfect storm of spending cuts and tax hikes that will send the economy back into recession if lawmakers don't do smething before January 2, 2013 – has become deeply embedded in the conventional wisdom.
But like so much of the conventional wisdom within the beltway media, it's also dead wrong. There is no “cliff” – it's more like a slope – and that means something quite significant: Congress doesn't have to do something – anything! – immediately. No disastrous “grand bargain” needs to be cut during the “lame duck” Congress following the presidential election. The federal budget simply isn't a fast-moving train.
Last week, widely respected budget nerd Stan Collender came on the AlterNet Radio Hour to explain all this stuff, and to talk about how key budget deadlines coming up in the next months are causing disarray within the GOP. Below is a lightly edited transcript of the conversation (you can listen to the whole show here).
Joshua Holland: Stan, first of all let’s talk about this “fiscal cliff” that has the pundits so hot and bothered. Isn’t it more of a slope?
Stan Collender: The Center on Budget and Policy Priorities in Washington was the first to point this out. In the aggregate, the tax increases and the spending cuts could push us back into a recession in a relatively short period of time, but it wouldn’t happen all at once. It’s not really a cliff. It’s more of a gradual slope. In fact, if Congress and the President didn’t get things done by December 31st, when we supposedly hit the “cliff,” they’d still have three or four weeks before any of this would really start to kick in and have a real impact. In other words there’s plenty of time to do things. We don’t have to rush into a bad decision by December 31st to avoid what sounds like a tragedy on its way.
JH: This is always the way we see these things. We must do something now, even if it’s a bad something. I think that that’s a dangerous idea to have out there.
SC: Before you go on. Remember the “fiscal cliff” -- that phrase -- was an invention of Ben Bernanke. He didn’t want to say what he really needed to say, which is that the policies in place now will cut the deficit too far and too fast. What he was really saying was don’t cut the deficit. We need the deficit to be higher and not lower. If he had said that, though, he would be target practice for the Republicans.
JH: The other thing I find problematic with the image of this cliff is that a cliff is a natural object. In reality there’s nothing that Congress passes that it can’t un-pass, short of a Constitutional amendment.
SC: In theory, that’s correct, but these days it’s not clear you can get a majority in the Senate to proceed to the reading of the Lord’s prayer. So doing anything on the budget might be a problem.
JH: Right and I’m going to get into that. You’ve written some really important pieces on that very subject, which I want to talk to you about in a bit.
But first, can you just give our audience a very brief summary of what is going to happen if Congress doesn’t act? I mean, theoretically if Congress did not act, what does this fiscal slope entail?
SC: Well there are many pieces here, but the big ones are as follows. The Bush and Obama tax cuts expire on December 31st. If they’re not extended or something doesn’t happen legislatively then that means on January 1, tax rates will go up for everybody, no matter how much you earn. The President wants to obviously extend them for individuals who earn less than $250,000 and let them expire for those earning any more. That’s the first thing.
Secondly, you have the payroll tax cut through December 31st. On January 1st, if there’s no change, that will go up back to the normal rate. You have a variety of other expiring provisions. You have the alternative minimum tax, which will start to hit everybody earning from about $65,000 and over. It’ll hit a lot of middle class tax people. It might be the largest tax increase on American middle class earners in US history.
So all of that and a few other things would trigger at midnight on December 31st unless there’s legislative action. Then on January 2nd the spending cuts -- $120 billion in spending cuts were triggered when the Supercommittee failed to come up with a deficit reduction plan -- they will go into effect. That’s $60 billion or so from defense and $60 billion or so from domestic spending. You have this harmonic convergence, let’s say, of tax increases and spending cuts -- which would have an enormously positive impact on the deficit. It might reduce it by hundreds of billions of dollars, but it would be coming at the wrong time. When the private sector is not spending money and when individuals are not spending money -- for a new iPad or something like that -- when trade is not helping at all and state and local governments are cutting back – that's exactly the time you don’t need the federal government to be withdrawing stimulus in the economy. A tax increase or the effect of a tax increase would throw us, according to the Congressional Budget Office, eventually into a recession for a couple of quarters.
JH: Of course when you talk about the impact on the budget deficit, the leading cause of our deficit is the recession itself and the loss of tax revenues.
When the GOP candidates debated in Iowa last year there was this very telling moment. Every single one of them, including the so-called sensible one, John Huntsman, said that they would walk away from a deficit reduction deal that had $10 in spending cuts for each dollar raised in tax revenues. I think that was a reflection of what they thought their base wanted to hear.
That kind of problem often gets obscured by the media’s tendency to blame both sides for every problem in Washington. So I want to make this very clear: all of this -- the debt limit showdown last year, the standoffs over the Bush tax cuts in the past few years, standoff over extending unemployment insurance -- really gets down to the fact that Speaker John Boehner can’t get his caucus to cut any kind of deal that raises even a penny in taxes. Is that right?
SC: Oh, that’s absolutely right. John Boehner is probably the weakest Speaker in my lifetime, and I’m in my early 60s. I’ve never seen a Speaker who has so little control over his people. In fact it’s just the opposite – his people seem to be able to roll John Boehner with a great deal of regularity. If you need any proof of that, just think about the big budget-related votes from last year. On the continuing resolution to prevent a government shutdown, there weren’t enough Republican votes to get it passed and they had to go to Democrats to get it done. The same thing is true for the debt ceiling extension – it required Democratic votes even though Republicans had a majority in the House.
Think of it this way. In 1995 and 1996 there were two government shutdowns. This was Gingrich v. Clinton. Gingrich at one point could basically go to his membership, go to the Republicans, and say this is what they’re doing because he thinks they need to do it, and his people would follow him. Gingrich could have said that if they don’t do this or that he’d resign as Speaker, and they would have prevented that from happening. If John Boehner goes to the Republican caucus and says if they don’t follow him he’ll resign, they might take him up on it. They very well might take him up on it. That’s the big difference. Gingrich cut a deal with Clinton. Boehner cannot do that with Obama and guarantee that his people will follow him anywhere.
JH: Before we get to January, Congress has to deal with the fact that the fiscal year -- the federal government’s fiscal year -- ends on the last day of September. They’re going to need to do a stop-gap measure to keep the government running. It’s what’s known as a Continuing Resolution. You wrote recently that this is causing agita within the Republican ranks. Can you unpack that?
SC: Here’s the basic situation. There is an agreed upon spending level for this year. This is what was passed last August in the Budget Control Act. This is what set up the anything-but-supercommittee and included the trigger for the spending cuts. Democrats want to keep to that spending level. They say a deal is a deal and that’s what everyone agreed to, but the Tea Party wing of the Republican Party in the House has basically told Boehner 'no.' They want to go significantly below that -- and then there’s even a subgroup of the Tea Party folks who want to go even below that lower level. So if Boehner tries to keep to the Budget Control Act level -- the one everyone agreed to last August -- he may not have enough Republican votes to get this done. Certainly if he tries to go to a very low level of spending, he definitely won’t have any Democratic votes to get this done.
So we’re in this interesting situation. October 1st, the start of the fiscal year, is a month before the election. So rightt before the election we could be facing another government shutdown threat because of Republican intransigence. The Democrats in the House know this, and the chances are they’re not going to provide the votes to prevent a shutdown unless Boehner goes to the level that Democrats want, which is the Budget Control Act level.
We’re talking about a lot of different things here, but the bottom line is I don’t think Boehner’s going to have the votes to get this passed on his own. He’s going to need Democratic support, but the more Democratic support he gets the more Republican support he’s likely to lose. A month before the election, the Republicans may be faced with this extraordinary situation where they can be blamed for shutting down the government. The 1995 and 1996 experiences – and the experience last August with the debt ceiling -- show that Americans don’t like that. The independents in particular don’t like that, and without the independents Republicans and Mitt Romney can’t win the election. So how would you like to be John Boehner? No matter what you do, it’s going to be wrong and painful. If you make the wrong choice, you not only could lose seats in the election, you could lose your speakership at the same time.
JH: It’s what happens when a significant share of your caucus are just complete ideologues. Now, Dems appear to be hanging tough on this one. They’re saying that they may be willing to just let all the cuts and tax hikes go into effect and just start with a clean slate.
This has always seemed an obvious path to many observers. We’re talking about the “Bush tax cuts” almost four years after he’s left office. The Dems might be better off just offering middle class tax cuts and calling them the Obama cuts.
I guess my question is whether you think they’ll have the backbone to stick to their guns on this, when it really comes down to shutting down the government? The basic Republican narrative is that government doesn’t work. This is something that Democrats don’t share, and that's kind of an inherent disadvantange in these fights.
SC: The interesting thing here is Republicans do use that rhetoric. Government doesn’t work and we need to have less of it. But you read the polls carefully, they say Americans don’t want less government. They just want government that costs less. Every time the government shuts down, people get furious. I mean everyone from seniors who are trying to get into a national park -- because the grass is not allowed to grow apparently when the government's shut down -- to contractors who realize there’s nobody there to process their invoices, let alone someone at the Department of Education who is there to answer your questions about student loans.
I don’t know how many people remember the 1995 and 1996 shutdowns, but people were furious and irate. Republicans seriously took it on the chin. So I’m not sure that there’s a lot to be gained by the Republicans -- except from their own base -- by shutting down the government or even threatening to shut down the government. And if they don’t have their base five weeks before the election, if they need to do something to sure up the base, if the base isn’t with them at that point, then the election is long gone. They shouldn’t be playing to the base at that point. They should be playing to the independents, who definitely don’t want the government shut down.
JH: I think one of the defining principles of our political economy -- and our political discourse about the economy -- is that people dislike “big government” as an abstraction, but then when you get to the specifics -- looking at Social Security or good roads -- they really like most of what government does.
SC: Almost poll after poll -- regardless if it’s a poll of Republicans or Democrats or Independents -- shows time after time that the only area where there’s universal support for cutting is foreign aid. Sometimes NASA, unless you live in Houston or Florida. More people are willing to get rid of that because they don’t think it benefits them. But every other are of government activity, every single one -- Medicare, defense, public education, whatever -- people are saying spend more, not less. My favorite poll on this is one of Tea Party people from South Dakota. Even they said – 65 percent of them said -- do not cut Medicare. In fact if anything increase it. If that’s where the Tea Party is then you can see why this is such an intractable problem. Playing to the base doesn’t help, because they’re a subset of a subset of a subset of Americans.
JH: Even when you talk about their willingness to cut foreign aid, that’s based on a faulty premise about how much we spend on foreign aid. It’s about 1 percent of the budget, right?
SC: Yeah it’s about 1 percent and the average American thinks it’s 26 percent. The other thing people say is let’s just cut waste, fraud, and abuse. Remember you have a deficit of about $1 trillion, which is roughly 25 percent of the budget. So unless you’re willing to find whole areas of government activity wasteful, fraudulent, or abusive, which no one is, you can’t do this on the spending side. There’s going to have to be a revenue component to any deficit reduction plan. That’s the only way it’s ever going to happen.
JH: And that’s why we keep bumping into this brick wall with the Tea Party caucus in the House.
Let’s talk about the military spending side of all of this. One of the great ironies is that the conventional wisdom among Republicans is that public spending does nothing to foster private sector growth, but the one exception seems to be with military spending. Then everyone becomes kind of a Keynesian economist all of a sudden. Put these defense cuts into context. How much does it really add up to? What kind of programs are on the chopping block?
SC: The CEOs of a number of major defense contractors were up on Capitol Hill this past week talking about how much damage that will do; how many people they have to lay off. First off, you shouldn’t say anything is “only” $60 billion. But while that is not an insignificant amount, it is only $60 billion – that’s roughly about 8% cut from programs.
JH: That’s 8 percent of the defense budget, not 8 percent of the federal budget.
SC: Yes -- of the defense budget. The problem is we don’t really know where those cuts are going to come from. The administration, which is not required to tell anybody yet, hasn’t told anybody yet. That’s one of the things that the contractors were saying. Republicans actually passed legislation in the House saying it can only take 30 days. The reason they want to do that is to put political pressure on the White House, to see what they want to cut. But the White House is doing what it’s allowed to do under the Budget Control Act, which is wait until they absolutely have to decide which cuts to make. I can tell you that the overwhelming likelihood is that personnel -- salaries of people in uniform -- will be spared, which the President is allowed to do. That’ll put some pressure on defense contractors.
We’ve been told by Republicans we need to cut spending. That’s the way to economic growth. And here’s a proposal to cut spending and they’re trying to stop it because it’s going to hurt the defense industry and require that jobs be eliminated at Lockheed Martin and General Dynamics. This is typical of the kind of two-faced, schizophrenic nature of the Republican position on the budget. On the one hand they say spending cuts don’t matter, that they will actually help the economy. On the other hand they’re saying it’ll hurt the defense establishment if you cut spending. You can’t have it both ways.