Some Perspective on the Fiscal Cliff Deal

January 2nd, 2013 at 11:45 pm

I’ve been debating the fiscal deal all day—just had a rousing conversation on the Larry Kudlow show, arguing with Jimmy Pethokoukis and Larry about the characteristics and implications of the deal.  As my readers know, I judge it as an incomplete step mostly in the right direction, but whether we’re able to continue in that direction depends wholly on the resolution of forthcoming challenges, most notably, the debt ceiling.

One problem here is that people are throwing around all kinds of numbers and talking points that are pretty untethered to reality.  In one debate today, Maya McGuiness and others were going on about major entitlement “reform”—i.e., cuts, Jimmy P and Larry were all wound up about the fact that there were hardly any spending cuts in the deal (Larry had a slide that had the ratio of tax increases to spending cuts at 41/1!  I point out the up until yesterday, the cuts to revenue ratio was $1.5 trillion/0—and yes, I know that’s not a real ratio).

We need to organize our thinking here.  For example, let’s start by agreeing on a fiscal goal and the most common one—one I would hope we could all agree on—is to stabilize the debt/GDP ratio within the 10-year budget window.  That is, just get to a point where the debt is growing less quickly than the GDP (I think Larry and Jimmy agreed with this, so that’s good).

As my CBPP colleague Bob Greenstein points out, this deal doesn’t get you there.  It’s $1.2 trillion short.  The President explicitly would like to achieve that deficit reduction through balancing spending cuts with further revenue increases.  Republicans, predictably, want out of the tax-increasing business.

So, we’ll be having lots of arguments that will be sure to generate lots of posts.  But achieving $1.2 trillion in deficit reduction does not require major entitlement cuts or cosmic tax reform.  It can be achieved through a combination of higher tax revenues, likely through closing some of the tax expenditures that were left in place in this last round, and spending cuts like those that were on the table earlier in the cliff debate (some of which I discuss here).

And I agree with Kudlow (and Krugman…weird pair, right?) too:  faster growth would also of course help achieve a stable fiscal path, not to mention get some peeps back to work.

The point is that we have a clear fiscal target and all comers are welcome to suggest specifics on how to hit it.  I just humbly request that your ideas are balanced between new revenues and spending cuts and that you avoid the hysteria of massive hand waving about massive changes that must be made lest we turn to dust… or a failed state…or Greece, etc.

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16 comments in reply to "Some Perspective on the Fiscal Cliff Deal"

  1. Bud Meyers says:

    The richest Americans got off easy again. They had their taxes go up from a measly 15% to only 20%. Most of the richest Americans got the best tax deal (don’t they always?)

    Those who earn salaries and wages up to the highest marginal tax rates are taxed the most, but the richest of the rich make most of their income from capital gains, not wages. Capital gains taxes (first started in 1921) has always been a preferential tax break for the richest Americans.

    In the mean time, while completing shopping for the holiday season, Wal-Mart heiress and billionaire Nancy Walton-Laurie personally spent millions on an extravagant mega-yacht and spitefully-named it “Employee Healthcare”.

    America’s “Job Creators” don’t buy “Made in America”

  2. foosion says:

    Once again, we have slow growth, massive unemployment and record low interest rates. The focus should be jobs and growth, not deficit reduction. Deficit reduction today just makes things worse.

    The goal of an economy is to make people’s lives better. Jobs and growth do that directly. Debt/GDP should be a means towards that end, not an end in themselves.

    We can’t bind future generations. Remember the Clinton to Bush experience. We had surpluses, which were used by Bush to cut taxes rather than deficits.

    Fix growth and the deficit isn’t a problem. Fix healthcare and all is well. Shifting healthcare costs from the govt to individuals just makes things worse.

    Let’s pursue policies that help people, not ones that make things worse.

  3. rjs says:

    if you’re thinking the goal was to stabilize the debt/GDP ratio, it sounds like Kudlow & Pethokoukis won…

  4. Joe says:

    We won’t get a solution to the debt issue (deficit issue is an easier tame) unless we work the issues at Medicare and SS.

    Why do we think that programs that are directed at a dramatically expanding population segment that have automatic COLAs embedded in the benefits should be funded by taxes that have not been increased in more than 20 years???

    We need to increase the payroll tax on everyone. If we all value those benefits then we all should be willing to pay more to assure continuity of them. You could tweak eligibility age and relative CPI used but without increasing the inbound funding the cuts will have to be too draconian.

    Fix these two programs and then work Medicaid and you will be making huge strides to getting the debt on the right trajectory.

  5. neb says:

    “….stabilize the debt/GDP ratio within the 10-year budget window. That is, just get to a point where the debt is growing less quickly than the GDP (I think Larry and Jimmy agreed with this, so that’s good).”

    Can you elaborate on what this ratio would be within the 10-year window? 60%, 70%?

  6. azlib says:

    If we only lived in a rational political world. Remember, the goal of the rabid right is to destroy the welfare state and not stabilize the debt to GDP ratio. In fact they really want the debt/GDP ratio to rise because then we really will not have enough revenues to support our social welfare programs. The rabid right cannot cut medicare and social security explicitly because the elderly generally vote Republican. That is about the only thing stopping them from dismantling those programs.

  7. John T says:

    The real deficit with terrible consequences for many is the jobs deficit. A national disgrace and a waste of human assets. If this was addressed the fiscal deficit would solve itself. We need another New Deal: jobs for anyone who wanted to work, breakup of large banks and better regulation of Wall Street.

  8. Peter K. says:

    Regarding long-term budget deficits as Duncan Black blogged:

    “But Republicans will inevitably see a balanced budget as an opportunity to give money to rich people (tax cuts and crony capitalism). The reward for liberals for this well done very important work? Tax cuts for rich people and unpaid for disastrous wars.

    Liberals should spend their time in office figuring out how to implement a sticky liberal agenda, one which is hard to dislodge, not figuring out how to create a pot of money for Republicans to steal when it is their turn.”

    But as Dean Baker has pointed out, the tax cuts for rich people and unpaid disastrous wars didn’t bust the budget, the housing bubble did that. We need a way to fix the shampoo economy.

  9. Bud Meyers says:

    I just did a little math…

    Out of a total of 151.4 million American workers, with the new tax deal only 586,000 actual “wage earners” will have their federal marginal income tax rates go up from 35% to 39.6% after their first $400,000

    The richest of the rich will have their tax rates go up from 15% to 20%

    But all “wage earners” will have the reinstated FICA taxes to pay (and the richest of the rich don’t pay Social Security and Medicare taxes on their “capital gains”)

    • Fred Donaldson says:

      Sometimes, as I shred my columns from 1960s, I wonder if we need a third and fourth party – at least one called Labor Party, dedicated to the worker and maintaining a good standard of living for those who work to make America work.

      • John T says:

        Good point Fred. The first and second parties, we’ll call them Republican and Republican Light, don’t seem to care about the biggest problem. There are millions of Americans who can’t find gainful employment. That is a disgrace and an emergency should be declared.

  10. ljm says:

    We really have to stop being the world’s cop. We can’t afford it. Anything defense related and spy related that isn’t directly related to protecting the United States should be considered for the chopping block. In terms of entitlements, Medicare needs to be able to negotiate drug prices and permit people to buy medicines overseas. Americans are being gouged on drug prices. Also, people who want to live overseas in countries that are more affordable should be able to use their medicare in those places. If the healthcare is cheaper in these countries, medicare saves money. Obviously, we can’t “deport” people for nursing home care in other countries, but if the people want to go on their own, we shouldn’t be making it hard for them to do so. Then there’s congress. If they can’t get anything done, why are we paying these people? Pay them based on productivity, not ability to be obstructionists.

  11. R. Nemo says:

    We need much more aggressive taxes on the rich. A wealth tax! Then we need massive military cuts. The rest of the budget is fine. There is no fiscal crisis. We need to run deficits around 20 percent of GDP dedicated to investment and infrastructure. Balancing the budget is nonsense. We have not had a balanced budget since 1776. Except for–what–2 or 3 years?

    We need to get real! What was it Gore Vidal said? United States of Amnesia!

  12. Michael Wells says:

    Sure, there are possible cuts. Why don’t we look at things that are actually harmful or wasteful? What if we only spent as much on the military as the next 5 countries together, rather than the next 10? How about auditing the pentagon, the only branch of government that isn’t audited? Stop subsidizing obscenely profitable oil companies. Cut price support for corn that makes high fructose corn syrup?

    These should be low hanging fruit. Look at things we’re paying for that are actually harmful, then if we need to look, at benefits last.

  13. Alyosha says:

    My heart overflows with compassion for you. Thoughtful people have taken the time to come here and shower you with gifts of wisdom, yet something keeps you from really absorbing their message. For my part, when I think of your situation I keep returning to the question of whose voices need to be heard in our media, and in our political discourse more generally. Who is left out of the balance?