Be afraid. Be very afraid. In fact, run for your lives, because we’re heading over the “fiscal cliff,” and the plunge will make a return to recession well-nigh inevitable. Such is the panicky, over-hyped inside-the-Beltway message being repeated ad nauseam by the usual establishment suspects: the mainstream media, the Sunday talk-show gasbags, Wall Street, and political centrists and economic conservatives everywhere.
While offering token nods in the direction of revenue enhancement as a partial preventive to the automatic triggering of the draconian 2011 debt-ceiling budget agreement between Congress and the president, these self-appointed guardians of the nation’s fiscal health make it clear that the spending side of the equation is what really needs to be addressed, especially those pesky entitlements.
As the Christian Science Monitor, a prime organ of the “responsible” center, put it in November, “Major decisions will have to be made on how to cut costs, decisions that will almost certainly be unpopular with many Americans.” Can Social Security be curtailed or Medicare be given an austere make-over? its editorialists hopefully wondered aloud.
The Monitor was not alone. “Barack Obama and the Republicans have little time to act,” the influential center-right journal The Economist opined alarmingly. And what action should they take besides identifying spending cuts? Why, adopting Mitt Romney’s revenue solution of capping tax deductions and exemptions, of course, while leaving actual tax rates as they are, including those on the upper 2% of earners. Repeating the “R” word (for recession) ominously and chanting “fiscal cliff’ like a mantra, one Economist spokesman argued that merely raising the top two income-tax brackets from 33 and 35 percent to 36 and 39.6 percent (the old Clinton rates), respectively, would “discourage work and investment and encourage tax avoidance.” We can’t risk that, can we?
And Fortune, the businessman’s bible, leaped aboard the bandwagon with this gem from columnist Geoff Colvin, “Let’s get something straight: Medicare as we know it is going to end,” adding that Paul Ryan’s premium-support (i.e. voucher) system constituted the most promising “bipartisan” alternative. Failure to compromise by adopting this “solidly centrist” proposal would mean doing a Thelma-and-Louise over the cliff and ending the American way of life. Colvin also attached a “bipartisan” tax addendum to his Medicare elimination as part of a fair and balanced cliff-prevention program; namely, fewer deductions, exclusions, credits, and loopholes, combined (naturally) with lower individual rates.
There’s plenty more scare talk where that came from. Among the prominent institutional cliff dwellers shouting their warnings about the approaching apocalypse (the horror! the horror!) are the business-oriented Committee for a Responsible Budget, the Peter G. Peterson Foundation, the Heritage Foundation, and the American Enterprise Institute. The latter two are pushing lower Social Security benefits, higher Medicare premiums, and an extension of the Bush tax cuts for all income classes. Add to the list Erskine Bowles and Alan Simpson, cochairs of the late, unlamented deficit commission and cofounders of something called Campaign to Fix the Debt, which includes an 80-member corporate CEO adjunct dedicated to entitlement cuts.
About the only establishmentarian institution not fully on board with staving off the fiscal cliff by means of austerity for the majority is the New York Times — in the form of its intrepid economics columnist Paul Krugman. Quixotically, Krugman has dared to directly confront the cliff-dweller stampede. In a series of hard-hitting op-eds since the election, he has had the temerity to play down the implications of the fiscal cliff and even advocate going over it, if necessary.
For this, Krugman has been pilloried by the scare mongers and, by implication, set up as the evil antithesis to the great centrist economic “explainer” Bill Clinton. Clinton, remember, is Erskine Bowles’ former boss and an endorser of the Bowles-Simpson deficit-reduction model. The ex-president is now being put forth by cliff dwellers as just the man to make a cozy deal that will save them from the fiscal tipping point. One problem, however: Paul Krugman is right.
It might be well at this point to recall exactly what the fiscal cliff is and why it’s a self-induced nightmare. In late 2011, Republicans basically took the Government hostage, demanding massive spending cuts in exchange for passing a federal debt-ceiling extension, formerly a routine pro forma exercise; congressional Democrats and the White House acceded to the ransom. The attached time bomb intended to spur a retrospectively hopeless agreement about specific cuts was that automatic, across-the-board spending reductions (the “sequester”) would otherwise start to kick in on Jan. 1, 2013, with a first installment of $100 billion.
Together with the simultaneous expiration of all the Bush tax cuts (“Taxmageddon”), as well as the termination of extended unemployment benefits and the temporary Obama payroll-tax reduction, the combined spending-cut/tax-increase would amount to between $600 and $700 billion. This is the so-called fiscal cliff.
Actually, it’s easily fixable, given common sense. The radical mandatory spending cuts could be immediately pared back as Democrats propose, exempting entitlements and reinstating unemployment benefits, and tax increases could be limited to the upper 2% — those over $250,000 in annual income. This would be a sensible, gradualist approach to deficit reduction, but Republicans are not sensible, so we may yet go over the cliff.
That wouldn’t be an altogether bad thing. The payroll-tax holiday should end; it endangers the long-run solvency of Social Security. And, like it or not, Americans really are undertaxed. We now pay the lowest overall federal taxes since 1950 and rank 24th out of 28 Organization for Economic Cooperation and Development countries in per capita taxation.
In particular, the American rich are undertaxed; the upper 1%, who own a third of the nation’s assets (the most in a century), pay the lowest top marginal rates on income and capital gains in over a generation, and the lowest in the industrialized world. If we did temporarily go over the fiscal cliff because of GOP intransigence against taxing, say, the wealthiest 2%, Democrats could certainly restore entitlement spending and reinstate existing tax rates on the bottom 98% by daring Republicans to say “no” to the middle class.
So, what’s the problem? “Fear,” as FDR said vis-à-vis the Depression, “nameless, unreasoning, unjustified terror.” C’mon cliff dwellers, the only thing you have to fear is fear itself.
Wayne O’Leary is a writer in Orono, Maine.
From The Progressive Populist, January 1-15, 2013
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