Tuesday, January 1, 2013

Message to the House: just say no

Midnight came and we toppled over the so-called fiscal cliff. But never fear, despite all the warnings about how tragic such an occurrence would be, celebrations for the New Year went ahead as scheduled. Kisses were exchanged, champagne was drunk, fireworks were set off throughout the land. Except in the U.S. Senate, which continued to work into the first hours of the New Year on legislation to solve our fiscal woes.

And in the end, at around 2:00 am EST, a deal was struck and passed overwhelmingly by a vote of 89 to 8. This deal would raise income tax rates and capital gains tax rates on incomes above $400,000 ($450,000 for couples), phase out some deductions for higher incomes, fix the AMT issues that have plagued middle-class incomes earners for years, extend unemployment benefits for another year, and table the looming mandatory cuts for anther two years. In short, it's an agreement to tax the rich and spend some more money, nothing more.

Policy wonks imagine that the agreed-to tax increases will translate into some $600 billion across the next ten years. Such estimates are based on assumptions that never tend to pan out though, since economic conditions are not static. Regardless, let's imagine that things go exactly as planned in this regard. Simple math tells us the revenue increase will be $60 billion per year. So, $60 billion more for 2013. But the extension of unemployment benefits will--all by itself--cost $30 billion. All other things being equal (which of course, they're really not), this deal means about $30 billion in revenue for this year and exactly $0 in spending cuts.

Pretty easy to figure the results on the bottom line, when it comes to the Federal Deficit. Across the past four years--FY2009 through FY2012--the Federal Deficit has topped $1 trillion dollars each year. In 2009, it was $1.4 trillion (thanks partly to the Bailout Bill, of course). In 2010, it was $1.3 trillion (it would have been much higher, but Bailout repayments from firms that never really needed the money helped up Federal revenues). In 2011, it was $1.3 trillion, again. And this last year saw a somewhat surprising drop to only $1.1 trillion (the White House OMB had predicted 1.3 trillion again). $30 billion more in revenue--with no cuts--means another trillion-dollar deficit in 2013.

For comparison, the highest the deficit had ever been for a previous year was $458 billion in 2008. It was a mere $160 billion in 2007. People--by this I mean politicians and pundits--tend to forget that the economy was actually growing from 2001 to 2007. The deficit under Bush was still high by historical standards (because Bush and the Republican Congress of those years spent money domestically like they were Democrats), but by 2004 revenues were growing faster than inflation, despite--or maybe because of--the Bush tax cuts. In 2007, for instance, revenues were almost $2.6 trillion. In 2012, they were $2.5 trillion. The same tax rates were in effect for both years, the difference is due to the economy, the rather pathetic "recovery" that has taken place since the recession ended in the middle of 2009.

Yet, the Federal government spent nearly $1 trillion more in 2012 than it did in 2007. And--amazingly--President Obama is crowing about his "success" in combating the deficit in 2012:
Last year in 2011, we started reducing the deficit through $1 trillion in spending cuts. Those have already taken place. The agreement being worked on right now would further reduce the deficit by asking the wealthiest 2 percent of Americans to pay higher taxes for the first time in two decades, so that would add additional hundreds of billions of dollars to deficit reduction. So that's progress, but we’re going to need to do more.
So for 2012, the cuts are "in place." Got it? We're all set, no more cuts are necessary. And indeed, the White House OMB estimates (Table 1.1) spending going up from 2013 to 2017, going over $4 trillion in 2015 and hitting $4.5 trillion in 2017. An additional $60 billion in revenues per year--based on this latest "deal"--does what? Very little, as that amounts to $300 billion by 2017. As has been stated numerous times by others, we don't have a revenue problem, we have a spending problem.

Which brings us back to the current solution, the legislation passed in the Senate that Obama is now urging the House to pass immediately. Those few Senators who voted against the deal are worth noting. They include Rand Paul, Marco Rubio, Richard Shelby, and Chick Grassley.

Rubio's reasoning:
Rapid economic growth and spending reforms are the only way out of the real fiscal cliff our nation is facing. But rapid economic growth and job creation will be made more difficult under the deal reached here in Washington.
It'd be one thing to raise taxes to reduce the deficit, but that's not what this deal does. It's a fiscal farce to raise taxes and hurt economic growth only to fuel more government spending with record deficits and debt," he said. "People at the grass roots want Washington to spend less, not more. Failure to deal with spending lets them down.
I do not support this agreement. Our economy needs spending restraint by the federal government and fundamental tax reform that eliminates corporate welfare and lowers individuals' rates. Instead, this package raises taxes, increases spending, and will lead to more borrowing. This deal is certainly no cure-all; rather, it falls far short of the measures necessary to promote job creation, economic growth, and fiscal stability.
And Paul's:
Not only are they raising taxes — maybe on a smaller percentage of people but a large amount of money — but they’re also going to spend more money. So it’s a spending bill.
All on the money, this deal is a loser. Even Paul Krugman thinks so, but for very different reasons:
So what Obama appears to have done is trade away part of the revenue from high-income taxpayers in return for some of the spending items he wanted. Extended unemployment benefits for a year, and the refundables either extended in perpetuity or for 5 years...

Anyone looking at these negotiations, especially given Obama’s previous behavior, can’t help but reach one main conclusion: whenever the president says that there’s an issue on which he absolutely, positively won’t give ground, you can count on him, you know, giving way — and soon, too. The idea that you should only make promises and threats you intend to make good on doesn’t seem to be one that this particular president can grasp.
Krugman actually labels Obama the "conceder in chief" for going along with the deal, simply because the tax hike was not big enough to pacify Krugman. But anyone with a modicum of sense can see that the real losers in this deal--aside from the American people--are those politicians who have been calling for spending cuts. As noted, this discussion has been tabled for two months, but that's akin to allowing that the cuts are never going to happen. Just like the imagined $1 trillion in cuts from 2011, the new round of cuts will never actually occur under these circumstances. It will turn into more future cuts and unenforceable decreases in proposed rates of growth for federal spending. As always.

The only way to actually achieve real cuts, it would seem, is to forego this deal in its entirety. Indeed, this may be the only way to cure the economy of its continued malaise, especially if it turns out that a recession is already underway.

Now this piece of crap deal is set to go before the House. And the pressure will be on for its passage, make no mistake. Not passing it will be perilous for many House members, as it will amount to increasing the taxes on a huge portion of the citizenry, on most of the voting public. Who wants that on their record, come reelection time? But vote it down, they should. Because it doesn't address the real problems at all. Indeed, it doesn't even address the symptoms. The President's talk about a "balanced plan" is laid bare for what it always was: nonsense and lies.

New Year's Resolution for the House: just say NO.

Cheers, all.

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